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China Compliance: Don’t Rely On Your China Staff, Part IV

China Law Blog - 10 hours 47 min ago

In Part 1 of this series, I discussed how Chinese staff of foreign companies operating in China typically view China compliance very differently than the foreign company itself. In Part 2, I talked about how the views of Chinese staff can negatively impact the foreign company’s China compliance efforts. In Part 3, I discussed one aspect of what often happens with the local Chinese staff when the foreign company starts to enact real changes in its operations.

Today, I focus in on how Chinese staff will seek to undermine those who it sees as behind the foreign company’s seeking to  implement an anti-corruption and compliance program, and what you as the foreign company must do in the face of this.

In Part 3, we described how employees firs react to a compliance program:

Typically when a foreign company begins establishing strong anti-corruption and compliance polices for its China operations, it will encounter strong resistance from some or all of its Chinese staff. There are multiple reasons for this and the one usually given by staff is the fear that acting within the law will hurt company competitiveness. But there is also usually another reason for resistance — this one unstated — and that is the fear by staff that their kickback gravy train will be ending or, even worse, that their previous kickbacks will be revealed and they will be fired.

It is not uncommon for Chinese employees to view their job as a platform for more than just a salary; it is also a platform for leveraging additional income through kickbacks. This view is even more prevalent among employees of foreign companies, which are viewed as easy marks.

When a foreign company initiates or toughens its China compliance and anti-corruption programs, the local employees cut off from their (usually substantial) additional income stream, commonly get quite angry about this. Usually, they start out by trying to convince the foreign company that it is making a big mistake and that its actions will prevent it from being competitive in China. They also will oftentimes accuse the foreign law firm for not having “any clue about how business is done in China” and demand that it be fired. My firm’s China lawyers have many times faced this.

You absolutely must be prepared for at least some members of your China staff to viciously go after those who seek to bring the China operation in line. You can expect to experience some or all of the following:

  1. The staff involved in kickbacks asserting that someone else insisted that they take the kickbacks.
  2. The angry staff insisting that the entire compliance clean-up operation is being done to take out certain people in the company.
  3. The angry staff insisting that some of those involved in the clean-up operation be fired. In particular, be prepared for attempts to be made to frame those people supporting the clean-up.

All of the above are much more likely to happen against a foreign employee than against a domestic employee. We have seen local staff provide “evidence” of improper expense reports against foreigners, make allegations of sexual harassment against the foreigner(s), and come up with “new discoveries” that the foreigner is no longer eligible for a work visa, just to name a few examples.

As shocking as the above may be to you, what we find even more shocking is how often the foreign company takes the bait either because they truly believe the misinformation they are being fed or simply because they lose the stomach to continue moving forward with the cleanup.

When our China lawyers take on a China compliance/anti-corruption program, they warn our clients about the above (and about a number of other things as well) and stress that if they are not going to follow the program through to completion, it is a mistake even to start. Stopping midway with a compliance program will inflict the pain but fail to provide the benefits. Compliance programs are critical for China, but only if done to completion.

Categories: Chinese IP

China Compliance: Don’t Rely on Your China Staff, Part III

China Law Blog - Tue, 08/26/2014 - 14:46

In Part 1 of this series, I discussed how Chinese staff of foreign companies operating in China typically view China compliance very differently than the foreign company itself. In Part 2, I talked about how the views of Chinese staff can negatively impact the foreign company’s China compliance efforts.

In this post, I am going to discuss one aspect of what often happens with the local Chinese staff when the foreign company starts to enact real changes in its operations.

Typically when a foreign company begins establishing strong anti-corruption and compliance polices for its China operations, it will encounter strong resistance from some or all of its Chinese staff. There are multiple reasons for this and the one usually given by staff is the fear that acting within the law will hurt company competitiveness. But there is also usually another reason for resistance — this one unstated — and that is the fear by staff that their kickback gravy train will be ending or, even worse, that their previous kickbacks will be revealed and they will be fired.

It is not uncommon for Chinese employees to view their job as a platform for more than just a salary; it is also a platform for leveraging additional income through kickbacks. This view is even more prevalent among employees of foreign companies, which are viewed as easy marks.

When a foreign company initiates or toughens its China compliance and anti-corruption programs, the local employees cut off from their (usually substantial) additional income stream, commonly get quite angry about this. Usually, they start out by trying to convince the foreign company that it is making a big mistake and that its actions will prevent it from being competitive in China. They also will oftentimes accuse the foreign law firm for not having “any clue about how business is done in China” and demand that it be fired. My firm’s China lawyers have many times faced this.

It is when the above fails to work that things get really tricky. The disgruntled employee oftentimes starts listing the illegal activities the foreign company has engaged in and then says, “You can’t fire me, because if you do I will report you for ten years of non-compliance.” Half the time, it is this very employee who (deliberately) set you up so as not to comply and then always assured you that you were in full compliance or that your non-compliance would never matter. Much of the time, your non-compliance actually benefitted this employee, like for example if you paid salary off the grid.

How do you handle this situation? The pat answer is by preventing it from happening in the first place. If you have a strong compliance program in place from day one and if you comply with the laws, these threats should have no impact. But that’s the pat answer. The real answer is that it depends. It depends on what your violations are and whether they can be remedied and at what cost and it also depends on what your employee really wants. Almost always the employee wants a top-tier severance package and oftentimes just giving him or her that will be enough to keep them quiet, especially since their going to the government may put them at risk as well.

Categories: Chinese IP

China Trademarks: Like a Box of Chocolates

China Law Blog - Mon, 08/25/2014 - 05:58

Those of us who deal with China trademarks on a regular basis are used to a certain level of weirdness. To be fair, most decisions from the Chinese Trademark Office (CTMO) are logical, apply the appropriate laws and regulations, and occur within the general expected timeframe. But a nontrivial number are simply bizarre, and come with neither warning nor explanation. A trademark might be rejected for a ludicrous supposed conflict, like having the word “the” in common with a previously registered trademark. A trademark might be registered when it should be rejected for being identical to a previously registered trademark. A trademark might sit in limbo for two or three years before it receives an official decision. You never know what you’re going to get. Just like a box of chocolates, if that box was a few weeks past the sell-by date. But even if you get two or three horrendous decisions in a row, you can usually convince yourself it’s bad luck rather than a trend. For this reason, it has taken people a while to realize that something monumentally weird is going on: the CTMO has stopped issuing decisions.

As it turns out, this is an open secret. Or rather, it’s not a secret at all, it’s just not being publicized. In conjunction with the new Trademark Law going into effect on May 1, the CTMO has been switching over to a new computer system. During the transition period, the trademark examiners have (in theory) been working as usual: reviewing applications and rejecting trademarks and approving trademarks and all of the other wonderful things they do. Except they have been doing all of this offline, and until the new computer system is operational, no one outside the CTMO knows exactly what the examiners have been up to or how many hundreds of thousands of decisions await dissemination. Had the transition to the new computer system taken a couple weeks, which was doubtlessly the plan, no one would have been the wiser. But like almost every major IT project in the history of IT projects, the transition is way behind schedule – nearly four months and counting.

The most recent update I heard was that the new computer system would be online by the end of this month at the earliest. Not exactly the boldest of pronouncements. The people at the CTMO cannot be happy with this situation; they busted their tails to get caught up before the new law went into effect and now, just a few months later, are more behind than ever. But the Chinese trademark agents (who handle the vast majority of trademark applications, and are required by law to handle all applications filed by non-Chinese entities) must be even unhappier. They’re the ones that have to pass along the results to their clients.

All of this is particularly ironic given the new Trademark Law’s inclusion of strict deadlines for trademark decisions, which was unabashedly publicized by news reports and law firms alike. But unless you’re Alanis Morissette, irony doesn’t pay the bills.

UPDATE (8-25): The CTMO has just started to issue a few rejections and approvals, but the massive backlog remains.


Categories: Chinese IP

China Compliance: Don’t Rely on Your China Staff, Part II

China Law Blog - Sun, 08/24/2014 - 08:28

In yesterday’s post, we briefly talked about the rash of legal problems lately besetting foreign companies doing business in China and of how foreign companies must avoid the temptation to assume that their Chinese staff have all China legal issues covered.

This post addresses the resistance foreign companies (and their lawyers) often face from Chinese staff when the foreign company seeks to comply with Chinese law. This resistance typically stems from Chinese staff who believe that “Chinese laws are stupid and unrealistic and routinely ignored.” They are of the view that if “we follow all of these laws we will not be able to compete with all of the Chinese companies that do not.”

Here’s the really scary thing: your Chinese staff is often correct and we could cite example after example as to why. How can you compete when your WFOE pays employees for a 40 hour work week yet your Chinese competitors are paying the same for 70 hours of work from their employees? How can your WFOE get the big contract without discretely giving a white envelope (usually in a briefcase) to the decision-maker just like all of your competitors do?

I do not purport to have the answers to these somewhat intractable questions so instead I will quote from what one of our lawyers told a client the other day. This client was told of concerns that we had about the people with whom it was doing business and instructed to retain us to make sure that none of these people were on any sanctions or prohibited entity watch-lists. The client responded by saying that no matter what we might find about the people and the companies, he didn’t see how his company would not go forward with the sale. “It’s three and a half million in sales,” he said. To which our China lawyer in charge of that matter responded by saying, “right, but I really think you need to weigh that against a potential three and a half years in jail. For you. Oh, and you might end up having to spend that time in both a China jail and a U.S. jail because you can be prosecuted by both countries and I’m not sure whether the U.S. will give you any credit for time served over in China.” He retained us to do the search, and fortunately, everyone checked out.

If you are serious about bringing your China business into compliance it will not be pain free or inexpensive. But hey, it beats the alternatives.

Categories: Chinese IP

China Compliance: Don’t Rely On Your China Staff

China Law Blog - Fri, 08/22/2014 - 08:54

You’ve heard the message. If you want to keep operating in China and stay out of legal trouble, the time is now to get your China house in order. And this is quite possible.

But, can you rely on the advice of your China staff to establish corporate and regulatory compliance procedures, as well as anti-corruption policies? The answer is a weak (or is a strong?) maybe. The problem is that far too often your local China staff  views compliance and legal issues far differently than you or a government audit would.

In Dead and alive: metaphors for (dis)obeying the law U.Penn’s language log explains a common Chinese phrase used during reporting on the recent OSI food scandal, and by doing so helps highlights the problem:

规矩是死的,人是活的。… “It conveys a fairly typical Chinese attitude towards any rules/laws/regulations: they are made to break, bend and be compromised. View it [sic] positively, this indicates a way of problem solving. [emphasis added]”

You want your Chinese staff to solve problems, but you must be wary of how they do so, because breaking, bending or compromising rules/laws/regulations does not work for foreign companies doing business in China. Foreign companies with a history of local-style problem solving are low hanging fruit for Chinese government bureaus looking to demonstrate they have the will to enforce their own laws and that they care about the citizenry they are to serve.

Our China lawyers are always getting contacted to help foreign companies after they have gone through the following:

1. Foreign company sees need, and has some will to become compliant with Chinese laws and regulations and to establish a “no bribery policy” and it so instructs its employees.

2. Upon being so instructed, its Chinese employees think that “if we follow all these stupid rules we cannot accomplish anything”

3. The Chinese employees insist that they understand the company’s new “get clean” directive but little to nothing changes. Nonetheless, the foreign company relies on its local Chinese employees, believing that everything is just fine.

4. A government bureau shows up for an audit.

5. The foreign company learns that everything is not fine and that claiming that it was only doing what its Chinese employees insisted was legal and right provides it no relief. In fact, it oftentimes learns that claiming to have done only what some Chinese government bureau itself told them it to do also provides no relief.

6. Now, in the crosshairs, the foreign company realizes they require assistance beyond what their Chinese staff can give. At this point, they call our China lawyers.

Our job at that point is to try to reduce the sanction because it is usually too late to avoid all consequences. Without question, it is easier to get legal before the government knocks at your door. And relying on your local China staff to get legal rarely is going to work. For more on this is the case, check out Your Chinese-American VP Don’t Know Diddley ‘Bout China Law And I Have Friggin Had It.

An important first step to preventing a compliance/corruption problem is establishing a strong anti-corruption policy that zealously works to prevent your company and your entire staff from violating the China’s anti-corruption laws and those of your home country. At minimum, this means you have provided an Anti-Corruption Compliance Manual, written in both Chinese and in English, to all of your staff, and that you regularly conduct staff training to ensure the necessary shift in company culture takes place. This also means that you have objective third parties audit your company for compliance and then you take actions necessitated by that audit report.

And that leads to our next post focusing on compliance, which will discuss further why you need to get compliant now.

Categories: Chinese IP

China Part-Time Employee Rules

China Law Blog - Thu, 08/21/2014 - 19:46

In China, the rules for part-time workers are not nearly as developed as the rules for full-time employees. In fact, it was only a few years did China begin legally recognizing part-time employees. The 1994 Labor Law applied only  to full-time employees and did not even mention part-time employees. In 2008, the revised PRC Labor Contract Law for the first time recognized part-time employees on a statutory level.

Unlike full-time employees, part time employees do not require a written contract. This does not, however, mean that the hiring and retention of a part-time worker is any less complicated than for a full-time employee and for the reasons set forth below, our China lawyers advise our clients to execute written contracts with both their full-time and their part-time employees. One reason to have a written contract with your part-time employees is to ensure that your employee understands the terms of employment and his or her work responsibilities and obligations. A contract makes clear that your employee (be she full or part time) agrees to obey all company rules and regulations. It can be particularly important to get something in writing regarding your company rules for protecting your confidential information, trade secrets and intellectual property.

A written contract also can serve as proof that your part-time employee is indeed a part-time employee. Towards that end, the contract should have a provision clearly stating the part-time nature of the position. At minimum, we typically like to put the following into the labor contracts we draft between our clients and their part-time employees

  • The working hours
  • The term/duration of the employment agreement
  • A description of the work the part-time employee will be performing
  • The part-time employee’s wages
  • Applicable labor protections and labor conditions

Note that you are not allowed to set a probation period for a part-time employee.

Under China’s Labor Contract Law, a part-time employee can work no more than four hours a day and no more than 24 hours in a week. If the part-time employee works more than these hours, you are at risk of “converting” him or her to a full-time employee, with all the legal obligations that go along with that status.

Chinese law requires that you pay your part-time employee wages at least every 15 days. This is different from the rules for full-time employees who are usually paid monthly. As with full-time employees, the salary you pay to your part-time employees must meet the local minimum wage requirement.

Chinese law allows either the employer or the part-time employee to terminate the labor contract at any time, without prior notice. As a general rule, the employer is not required to pay any economic compensation to the employee.

Employers are also normally required to pay only work-related injury insurance for their part-time employee but because every locale in China seems to have different rules on this, we always check first with the relevant authorities to figure out our client’s benefit obligations for part-time employees.

Categories: Chinese IP

How To Get Legal In China. Now.

China Law Blog - Wed, 08/20/2014 - 16:20

During the past year, the number of calls from American (sometimes European) SMEs pushed out of China for having operated there without a legal entity (such as a WFOE) have doubled? What is causing this increase of foreign companies getting shut down in China?It’s the economy, stupid.

As China’s economy tightens, various local governments increase their crackdowns on foreign companies operating illegally. Period. But what also happens is that these foreign companies terminate their relationships with their Chinese personnell and then those ex-personnel report the company for operating illegally.

Generally, there is not much our China lawyers can do for a company that has been pushed out of China, but there is a lot we can do for those companies seeking to go legal. And fortunately, the calls and the emails from those companies have increased as well, no doubt due to what they have heard is happening to their compatriots.

The first thing we as lawyers need to do to help these companies get legal (and fast) in China is to figure out how they are currently operating in China (illegally) and then figure out the best way to get them operating legally.

An email from one of our China lawyers to such a client passed my desk the other day and I thought it would be helpful to reprise it here, with changes made so as to completely camouflage the company to whom it was written:

 

Please provide more details about your business model, including the following:

I understand that your core business is selling _____ products. How do you sell these products? (On the Internet? In a store?)

To whom do you sell your products? (Direct to the consumer? To a store? Via a distributor?)

Where do you sell your products? (The US only? North America? Europe? Asia? China?)

Do you have goods manufactured solely for your own company, or do you sometimes have goods manufactured on behalf of a third party?

What percentage of your products come from China?

Please provide more details about what you are doing in China, including the following:

  • I understand that you currently purchase from approximately _____ factories in China and import approximately ____ thousand containers per year. Are your purchases spread fairly even across those factories, or do you order a large percentage from a few of them? 
  • Are the factories scattered across China, or are they concentrated in one or a few areas?
  • Do you have factories make customized goods for you, or do you order “off the shelf” goods that the factories already make?
  • Do your products bear your brand/trademark, or the brand/trademark of any third parties?
  • For how long have you been working with these factories? How did you come to choose them?
  • How do you purchase your products from China? Do you purchase them directly or via a middleman/sourcing agent? Do you use contracts? Purchase orders? Are you committed to purchasing minimum quantities of anything?
  • Do you have any plans to add new factories or drop existing factories?
  • Do you have any other plans to change your operations in China during the next 1-3 years?

Please provide more details about your “employees” in China, including the following:

  • I understand that you currently engage ____ people in China to ______. On what basis have you engaged them?
  • For how long have they worked for you?
  • How did you hire them in the first place?
  • Have they signed a contract? A confidentiality agreement? Anything?
  • How do you communicate with them? 
  • How much do you pay them?
  • How often are they paid?
  • In what currency?
  • In what manner (check, wire transfer, cash, etc.)?
  • What arrangements, if any, have you made for payments into these “employees’” social insurance accounts?
  • What are their responsibilities?
  • To whom do they report to?
  • Where in China do they work?
  • Do they have an office? If so, where is it?
  • Have you ever engaged other people in China besides these ______ current people? If so, how did those engagements end?

Please provide more details about your future hiring plans in China, including the following:

  • I understand that you are thinking about engaging ____ additional people in China. When do you anticipate bringing them on?
  • How much will you pay them?
  • What will their responsibilities be?
  • To whom will they report?
  • In what city will they work?

What are your main concerns regarding your operations in China?

  • Compliance with Chinese laws, including labor laws?
  • Developing a market for your products within China?
  • Ensuring product quality and compliance with relevant laws in the markets where you sell?
  • Protecting your IP?
  • Something else?

Once we get answers to the above, along with answers to various follow-up questions, we are ready to start presenting various options, along with their plusses and minuses and their costs.

Categories: Chinese IP

China Contracts and the Unknown Counterparty

China Law Blog - Tue, 08/19/2014 - 05:48

Whenever one of our China lawyers drafts an agreement for a client doing business in China, one of the first things we ask is the identity of the Chinese counterparty. It’s a deceptively simple question.

The typical Chinese manufacturer (for example) is composed of multiple entities, with complicated lines of ownership. One entity may run the factory, another entity may run the office, and a third entity may serve as a holding company – and is probably based in Hong Kong or Taiwan. Overseeing the entire operation is a controlling shareholder who could care less which entity is the contracting party. And every single person on the Chinese side ignores corporate formalities and behaves as if all the entities are interchangeable.

But the entities are not interchangeable, and the counterparty matters. How it matters depends on your goals and the Chinese side’s corporate structure.

One basic rule is that the counterparty should have financial resources. No rational company should sign an agreement with a counterparty that is effectively judgment-proof. But many holding companies, especially those in Taiwan and Hong Kong, conduct no business other than receiving payments, and their bank accounts are emptied every few days.

Another rule is that the counterparty should be the entity that you pay. In the face of a stack of wire transfer receipts and a signed contract, it’s hard to argue that a business relationship doesn’t exist. This rule is considerably less compelling, however, when the Chinese side insists that payments be made to its holding company.

Meanwhile, if you have any hope of stopping IP infringement, the counterparty should be the entity most likely to steal your IP – the factory. But the factory may be an otherwise impractical choice if it has neither financial resources nor English-speaking personnel.

Similarly, you will need to consider dispute resolution, especially if the holding company is a Hong Kong or Taiwan entity. Where do you want to litigate (or arbitrate)? And where do you need to enforce the judgment?

Regardless of the named counterparty, any contract should reflect the reality of your relationship with the Chinese side. If the factory handles manufacturing and shipping, the office handles communication and orders, and the holding company handles all payments, then the contract should make that clear. The ideal situation, of course, would be for one Chinese entity to handle everything. But reality rarely matches the ideal.

Determining what makes sense in your particular situation will require a combination of common sense and due diligence. And, increasingly, common sense when conducting due diligence.

Categories: Chinese IP

Vietnam As China Replacement

China Law Blog - Mon, 08/18/2014 - 05:48

You know how when you buy a particular kind of car you all of a sudden see that particular brand of car everywhere? A similar thing has been happening to our law firm with respect to Vietnam. As soon as we brought on a really experienced Vietnam lawyer, we started seeing Vietnam opportunities just about everywhere:

  • The high end shoe company client that was being threatened with a massive law suit in China by its China supplier for funds allegedly owed that supplier for shoes that our client literally could not sell? Start making the shoes in Vietnam.
  • The clothing company that paid its long-time China supplier right before that supplier shut down and disappeared with all of the money? Transfer manufacturing to Vietnam?
  • The American company whose China work force and China suppliers have combined to raise costs so much that it can no longer make a profit? A move to Vietnam is in order.

But what has recently really put the frosting on Vietnam’s cake has been the increased coziness between the U.S. and Vietnam governments. The New York Times did a story on this, entitled, In China’s Shadow, U.S. Courts Old Foe Vietnam, mostly focusing on the rapidly warming political relations between the two countries. But needless to say, with the warming political relations has come warming economic relations and what that means on the ground is that Vietnam is redoubling (if retripling were a word I would have used it) its efforts to bring in American businesses. I was in Vietnam during the riots against Chinese businesses and the word everywhere was that declining Vietnam-China relations meant that Vietnam would need to buff up its welcome mat for American companies and it has unrelentingly done so pretty much ever since.

Two days ago, in Foreign Executives in China. Worry Me Yes or Worry Me No? we wrote about how American executives that have acted within the law in China need not panic due to what is happening there with the onslaught of anti-corruption and anti-trust claims being brought against foreign companies. But that does not mean that American companies should not be looking at their China businesses holistically and making the tough decisions as to whether to stay or go or maybe just supplement.

For more on Vietnam as a China replacement, check out the following:

Categories: Chinese IP

China’s SaaS Market: WFOEs Need Not Apply

China Law Blog - Sun, 08/17/2014 - 08:41

A major trend in the business software business is provision of software not through installation on a customer’s computer but rather through online access using the Internet. This approach is known as software as a service (SaaS). Though SaaS is a major trend in the U.S. and Europe, SaaS in China by a foreign company or a WFOE is not possible. This poses major issues for foreign software companies seeking to enter the China market.

China recognizes the SaaS method of providing software. However, use of the Internet requires that the provider acquire a commercial ICP license. Since SaaS by definition makes use of the Internet, all SaaS systems in China require the provider obtain a commercial ICP license.

Here is where the problem arises. A WFOE or other foreign owned entity cannot obtain a commercial ICP license in China. There are no exceptions to the rule. Accordingly, if a WFOE or foreign entity wants to offer its software in China though a SaaS system, it must do using an indirect method such as licensing the software to a licensed Chinese entity through a method often called an “Internet portal”.

China’s Ministry of Industry and Telecommunications (MIIT) is in charge of Internet licensing. The MIIT has become even clearer on the SaaS rule as it confronts the growth of software business in China. In particular, its position on foreign software providers has hardened over the past several months as China responds to Snowden’s NSA revelations and the cyber espionage claims of the U.S. against the Chinese military. In the past, many U.S. software providers argued that the commercial registration rule did not apply to their business because no e-commerce was conducted on the SaaS site. Others argued that a Ministry of Commerce exception applied to their SaaS offerings. These arguments have been forcefully rejected by both the Beijing and Shanghai offices of the MIIT and they cannot be relied on for future SaaS business in China by foreign companies.

Accordingly, a WFOE has available the following two methods for selling its software in China:

  • Direct sales to customers. Software is installed on the client server and all data is housed on the client server as well. If the client wants to make the data available to the general public, the client does this on its own Internet site, under its own license. The WFOE would in no way be involved in this process. The WFOE could of course be engaged to manage the entire process, including creating an intranet available only within the client’s premises or as an Internet site available to the general public. The licensing (commercial or non-commercial) for such a public website depends on how the service is constructed.
  • SasS offered through a service/license agreement with a 100% Chinese owned Internet ”portal.” As noted above, provision of software through SaaS cannot be done directly by the WFOE because the provision of SaaS services in China by ANY entity requires a commercial ICP license. That is, if a 100% Chinese owned company wants to provide its software through SaaS, that Chinese entity must obtain a commercial ICP license. Note that it is not relevant what the customer will do with the software. All that is relevant is that 1) the customer is paying for the software and 2) access to the software is delivered through the Internet. Thus, the argument that SaaS software is not commercial because no e-commerce is done on the providing website fails. If the WFOE is paid for the software the whole transaction is commercial and it is therefore subject to the commercial ICP license requirement that applies to all SaaS activities in China.

To use a SaaS approach, the WFOE will be required to offer the software through a Chinese owned company that owns a commercial ICP license. Such an entity is referred to as an Internet portal. Under an agreement with a portal, the WFOE would contractually engage the portal to offer the SaaS software package, using the portal’s license as the applicable commercial ICP license. Because the portal approach is new in China, there is currently no standard portal agreement or portal structure.

Though the portal approach is a new concept, the MIIT officials in both Beijing and Shanghai have in just the last few months told our attorneys on multiple occasions and without hesitation the following:

  • SaaS CANNOT be done directly by a WFOE. There are NO exceptions.
  • Indirect provision of foreign software services through a portal arrangement is acceptable because the portal entity will be entirely responsible for complying with Chinese law. All MIIT offices we have contacted have affirmatively recommended the portal approach without any prompting from us.

To summarize: there are two ways a WFOE can sell software in China: Direct sales through the WFOE or indirect sales through an Internet portal. There is no intermediate method that allows for direct sales using the SaaS approach.

Many of our clients are contacted by ISPs, cloud service providers and related entities in China who claim to offer just such an intermediate method. Such offers should be viewed with caution. In our experience, these offers are coming from two kinds of companies: 1) companies that do not understand the law and 2) companies whose business model is built around evading/violating the law. Given China’s current legal environment regarding foreign companies, it makes little sense to operate in a way that claims to exploit a loophole or grey area.

Categories: Chinese IP

Foreign Executives in China. Worry Me Yes or Worry Me No?

China Law Blog - Sat, 08/16/2014 - 11:36

With the media recently paying so much attention to foreign businesspeople getting in trouble in China, the phones of our firm’s China lawyers have been ringing off the hook from worried Americans based in China. We are getting the following kinds of questions and we are giving the following kinds of short answers (needless to say, our long answers are much more nuanced):

1.  Should I leave China? Not unless you or your company have violated Chinese law in such a way that you are at risk for going to jail.

2. But isn’t China arresting innocent foreigners?  Not as far as we can tell. We obviously do not have all of the facts or even close to the facts we need to answer this question with any sort of certainty, but it appears that China is going after foreigners it honestly believes have violated Chinese law. We see so many foreign companies operating in violation of Chinese law that we almost have to believe that no matter what the reason is for China’s increased crackdown against foreigners, there is no need for China to start arresting people for no legal basis at all.

3. What about my D&O insurance, that will cover me won’t it? Not exactly. It will may prevent you from having to pay for your own defense but it sure as heck isn’t going to keep you out of a Chinese jail.

4. But if they come after me, I’ll have time to just leave on an airplane right? Very doubtful.

5. Is this crackdown really any worse than it’s always been? We are not sure. It feels like it is but that is always hard to gauge.

6. What should I do to avoid going to a Chinese jail? Don’t violate the law. More importantly, make sure nobody else in your company is violating the law.

7. Am I crazy to be worried? Absolutely not. You’d be crazy not to be worried. Your worry will lead to you and your company taking necessary steps for protection, so it’s a good thing. Just don’t worry too much and don’t let it paralyze you. Again, it just does not seem that China is acting randomly here.

8. But what about Chinese companies, aren’t they all doing what these foreigners are getting arrested for? Yes, but so what? How will that help you?

7. Should I leave China right now?  See #1 above.

I am going to conclude this post with a really really long list of the posts we have done over the years relating to criminal liability for foreigners. I am providing this long list to show that this issue goes all the way back to the inception of this blog in 2006, to show the panoply of criminal issues that can impact a foreign business in China, and mostly just to show that China has not and probably is not going after people without any legal basis for doing so.

Categories: Chinese IP

China Product Counterfeiting: Using UDRP To Shut Down The Website

China Law Blog - Wed, 08/13/2014 - 16:08

Our law firm has in the last year had probably twice as many counterfeit matters as in any prior year. Not sure if this is because counterfeiting is on the increase or if it is just because American companies are getting so sick of it that they are becoming more likely to take action. Most of these matters involve Chinese companies shipping counterfeit product into the United States.

There are all sorts of ways to try to shut down Chinese counterfeiters but today’s post focuses on only one of those: trying to shut down the counterfeiter’s domain name. In a subsequent post we will talk about using a Section 337 action before the International Trade Commission.

Chinese companies are quick to register domain names similar to those of the foreign companies they see. We frequently see the following sorts of domain name thefts by Chinese companies seeking to sell counterfeit products:

  • Domain names that contain a common typo of a known trademark.
  • Domain names that take a known trademark and attach a generic word like “outlet” or a word descriptive of the product, such as “shoes.”
  • Domain names that are exactly the same as a known trademark’s domain name, but with a different extension.  For example, abc.net, instead of abc.com.

It is usually relatively easy to shut down the domain usage by companies selling counterfeit products, even when it is a Chinese company with the domain name. The Internet Corporation for Assigned Names and Numbers (“ICANN”) developed The Uniform Domain Name Resolution Policy (“UDRP”) to resolve domain name disputes, and international arbitration of disputes under UDRP is administered by a list of ICANN approved dispute resolution service providers.

Anyone who registers a domain name has agreed to the registrar’s terms and conditions and that includes committing to be bound by the UDRP.  he UDRP’s purpose is to prevent cybersquatting, which is defined “as registering, trafficking in, or using, a domain name with bad faith intent to profit from the goodwill of a trademark belonging to someone else.” Tenneco Automotive Operating Company Inc. v. Naushad Dhukka / SoftDot Technologies, LLC,NAF, FA1104001384326 (May 31, 2011).

When a complainant can show that another party is using a domain name in “bad faith,” the UDRP will either transfer or cancel the offending domain name at the request of the complainant. We usually recommend that the domain name be transferred to our clients so nobody else can grab it at some later date and then force our client to go through another UDRP domain name arbitration.

Companies need to be proactive in locating and excising “bad faith” websites as soon as they are discovered because those offending sites can not only damage a company’s online presence, they infringe upon and can ultimately dilute legitimate trademark rights. Of course, this only shuts down those domain names that are already in existence; it does little to prevent new ones.

Categories: Chinese IP

Forming A China WFOE: The Agony and the Ecstasy

China Law Blog - Mon, 08/11/2014 - 05:48

At least once a month, one of our China lawyers will get a call from someone asking us to form a “China company” for them before they start doing business in China “next month.” Half the time when we get this sort of call, the better solution is not to form a China entity at all. The other half of the time, the problem is that forming a China company typically takes at least four months and after you finish reading this post you will understand why.

American lawyers often take on domestic company formations as a loss leader because the work tends to be fast and easy and they expect that the firm will get additional legal work once the company is formed. With China company formation, I often joke that the process is so onerous that our client never wants to speak with us again after we finish.

This post focuses on forming a Wholly Foreign Owned Entity (WFOE) in China because this is by far the most common entity formed for foreign companies doing business in China. I would estimate that of the last 200 companies my law firm has formed for American companies in China, 180 have been WFOEs, 18 have been joint ventures, and two have been representative offices. (And the joint venture numbers are only that high because one of our China lawyers is so well known for his joint venture expertise.)

The steps for forming a WFOE in China typically initially consist of the following:

1.  Determining if the proposed WFOE will conduct a business approved by the Chinese government for foreign investment. China remains closed to foreign companies engaging in certain types of business, and regularly issues a catalog detailing which industries are open to foreign investors, and under what constraints. For some industries, foreign investment is only allowed via joint venture.

2. Determining if the foreign investor is an approved investor. In theory, any legally formed foreign business entity is authorized to invest in a WFOE in China. The investor must provide documentation from its home country proving it is a duly formed and validly existing corporation, along with documentary evidence identifying the person from the investor authorized to execute documents on behalf of the investor. The investor also must provide documentation demonstrating its capital adequacy in its country of incorporation.

To meet these requirements, the following documents are normally needed from the investing business entity:

  • A copy of a Certificate of Good Standing (or equivalent document) that has been certified by the issuing Secretary of State (or equivalent), authenticated by the Department of State, and then authenticated by the Chinese Embassy.
  • A copy of a Business License (or equivalent document identifying the investor’s directors and officers) that has been certified by the issuing Secretary of State (or equivalent), authenticated by the Department of State, and then authenticated by the Chinese Embassy.
  • An original bank letter attesting to the investor’s sound banking relationship and account status.
  • A copy of the passport of the investor’s signatory.
  • A description of the investor’s business activities, the most recent annual audit, and supporting materials such as documentary proof of the investor’s involvement in the selected industry for at least three years.

Depending on the Chinese city of incorporation, some or all of the above needs to be translated into Chinese or summarized in Chinese.

Many investors create special purpose subsidiaries (often in Hong Kong) to serve as the investor in China. Though the Chinese regulators have become accustomed to this process, they will still seek to trace the ownership of the foreign investor back to a viable, operating business enterprise; investor secrecy is not an option in China. However, the corporate register for the Chinese company will merely state the name of the foreign, special entity investing company as the owner. In that sense, as far as public disclosure is concerned, investor privacy can be maintained.

3. Chinese government approval for the project — that is, the work which the WFOE proposes to undertake. In China, unlike in most countries with which Western companies tend to be familiar, approval of the project by the relevant government authority is an integral part of the incorporation process. If the project is not approved, no incorporation is permitted. The two are inextricably linked.

The following documents must be prepared for incorporation/project approval:

  • Articles of Association. This document should set out all details of management and capitalization of the WFOE. Nothing can be left for future determination. All basic company and project issues must be determined in advance and incorporated in the Articles. This includes identifying directors, local management, local address, special rules on scope of authority of local managers, and the amount of registered capital.
  • Feasibility Study. The WFOE will not be approved unless the local authorities are convinced it is feasible. This usually requires a basic first-year business plan and budget. We typically use a client-produced business plan and budget as a model for drafting a feasibility study (in Chinese) that will satisfy the requirements of the Chinese approval authority.
  • Lease. Most Chinese cities require the investor provide an executed agreement for all required leases. This means an office lease as well as (depending on the industry) a warehouse/factory lease. It is customary in China to pay rent one year in advance and this must be taken into account in planning a budget because the governmental authorities will be expecting this. Moreover, each lease must be for a space that is suitable for the proposed industry and approved for use by a foreign-invested entity. The investor must also provide documentary proof that the landlord owns or controls the property and has a business scope enabling it to rent out the space. We oftentimes spend weeks confirming that our client’s proposed space can work for a WFOE.
  • Proposed personnel salary and benefit budget. If the specific people who will work for the company have not yet been identified, one must at least specify the positions and proposed salaries/benefit package. Benefits for employees in China typically range from 35% to 40% of the employee base salary, depending on the location of the business. Foreign employers are held to a strict standard in paying these benefit amounts. The required initial investment includes an amount sufficient to pay salaries for a reasonable period of time during the start up phase of the Chinese company.
  • Passport, photos, and résumé of the WFOE’s legal representative, and sometimes of other named directors and officers.
  • The Chinese name of the WFOE. This must include the WFOE’s business scope.
  • Any other documentation required for the specific business proposed. The more complex the project, the more documentation that will be required.

All of the above documents must be prepared in Chinese.

It usually takes two to five months for governmental approval, depending on the location of the project and its size and scope. On large and/or complex projects, the approval process often involves extensive negotiations with various regulatory authorities whose approval is required. For example, a large factory may have serious land use or environmental issues. Thus, the time frame for approval of incorporation is never certain. It depends on the type of project and the location. Foreign investors must be prepared for this uncertainty from the outset.

All of the above documents must be submitted to the authorities in the specific district in the city in which the WFOE will be located. This means that the investor must find office/warehouse space and sign any required leases before it can even begin the application process.

The above is the agony. The ecstasy is when the company is finally approved, which, believe it or not, happens pretty much every time so long as the American company does all of the above correctly.

Categories: Chinese IP

US-China Legal Summit in San Francisco on October 9

China Law Blog - Sun, 08/10/2014 - 15:21

ALM, publisher of The American Lawyer, The Recorder, Corporate Counsel and The Asian Lawyer magazines, will be hosting the inaugural US-China Legal Summit in San Francisco on Thursday, October 9, 2014. Registration is free for in-house counsel and we have managed to secure a 50% discount for China Law Blog readers.

This event will present best practices for companies seeking to make the additional of Sino-American commerce while minimizing risk and meeting compliance requirements.  Topics will include:

  • Anticipating, Preparing for and Navigating Arbitration & Litigation in China
  • How to Respond to and Manage Anti-Trust Investigations in China
  • Managing FCPA Risks in China

“Don’t miss your chance to discuss your challenges and strategies related to business and legal relations in China with peers from companies such as ConAgra, John Deere, Google Inc., Whirlpool Corporation, McKesson Corporation, and more.”

I will be co-chairing this event, along with Randall Lewis, Vice President and International Counsel at ConAgra Foods Inc.

To get your 50% off registration discount, use Promotion Code CLBVIP when registering and for additional. details on the agenda and to register, please visit the Summit website here.

We hope to see you there.

Categories: Chinese IP

Hit Us Where It Hurts: China’s Ban on U.S. Agricultural Products Grows

China Law Blog - Sat, 08/09/2014 - 21:53

By Lucas Blaustein*

U.S. agricultural exports to China have increased by 120% since 2008, to nearly 28.9 billion dollars in 2013. Agriculture now accounts for nearly 24% of US-China trade .

Since China’s admittance to the World Trade Organization (WTO), China and the United States have increasingly traded their comparative advantages. Daily, Chinese made iPads, Lenovo computers, Nike sneakers, and other material trappings of American consumerism arrive in U.S. ports, where they are unloaded and then returned filled with U.S. grain products like soybeans and corn. But in November 2013 the system began to break down, as corn exports to China came to a halt.

What caused this halt was the discovery by China’s Inspection and Quarantine Services (CIQS) of an unapproved genetically modified corn varietal called MIR-162 in imported shipments. Import permits began to be denied, and US corn exports to China gradually decreased to nothing. Grain merchandisers and U.S. farmers were horrified, as the fastest growing market for U.S. corn closed its doors.

Agribusiness companies and Chinese importers were quick to react, replacing corn grain as the number one U.S. export to China with a corn based ethanol byproduct called distiller dried grain with solubles (DDGs). For a time it seemed that American grain merchandisers had found a solution to China’s ban on U.S. corn with DDGs, but this “solution” was short-lived. In the spring of this year China stopped returning import permits for DDGs.  After months of confusion, the U.S. Embassy in Beijing on July 24 received a short message stating that “U.S. DDGs imports must now be tested at origination for the unapproved gene MIR-162.” In the space of a day, traded corn prices dropped by more than half.

Shortly thereafter the USDA issued a statement asserting that there is no reliable, affordable method of testing for MIR-162 in DDGs, nor is there even a regulatory body in the United States with the manpower or funding to conduct such a test, even if one existed. In other words, what China did on July 24 was to ban importation of all U.S. corn based products.

Why did China do this?

Sino-U.S. relations are at one of their lowest points since before China’s period of great opening up. In light of recent events involving Apple, Microsoft, GSK, Cisco, KFC, Starbucks and many other American businesses in China, it would not be out of bounds to view China’s ban on U.S. corn imports as punishment for worsening relations. The National Grain and Feed Association (NGFA) estimates that China’s ban has cost U.S. farmers and agribusiness firms nearly three billion dollars. U.S. farmers could be hit especially hard during the upcoming year, with larger than average corn yields anticipated, and more new unapproved GMO varietals in the ground.

But what is often lost from the punitive argument is the Chinese side of this story.

In 2,500 years of historical records, famines were observed in at least one Chinese province every year up until the mid-20th century. While in modern times greetings like, “你吃饭了吗”?, or “have you eaten?” have become a signal of a person’s rural upbringing, they are still indicative of the powerful impact of food insecurity on Chinese psychology. It is this history that leads China continue to emphasize food security in its annual No. 1 Document, which this year made clear that “China should take good control of its own bowl,” by “intensifying support and protection for [domestic] agriculture.”  There are three parts to China’s food security policy: 1) invest in modern agricultural practices and grain storage capacity; 2) develop local GMO varietals to increase crop yields; and 3) protect local grain farmers.

Through investments in modern agricultural practices, total corn production in China has risen rapidly from 165 to 205 million metric tons, a near a 25% increase from 2008 to 2012. China has also built an enormous network of modern computerized grain storage facilities, with nearly 300 million metric tons of storage available. China was a net corn exporter from 2002 to 2006.

China knows GMO technology is critical to increasing crop yields, so investment in GMO technology has surged, despite public fears over negative health effects. Chinese officials are wary of becoming overly reliant on genetically modified seeds from the Western world. Within the last six months eight Chinese Americans and nationals have been arrested on accusations of corporate espionage and theft of American seeds. MIR-162 grain imports may not be allowed into China, but China desperately wants access to the technology that produced the MIR-162 strain.

With lower input costs and better technology, world corn prices have been lower than China’s domestic corn prices for years. For this reason, Chinese companies have imported significant amounts of corn. The easiest way for China to protect local farmers is to force the purchasing of Chinese corn by limiting the amount of foreign corn that enters the Chinese market.

Protection for local farmers, fear of reliance on foreign GMOs, and investments in agriculture are all part of China’s broader food security strategy. Banning U.S. corn for food security reasons is probably as strong an argument for why China banned U.S. corn as punishment for worsening relations.

With Sino-U.S. relations still very poor, another record corn crop this year in China, as well as Ukrainian, Brazilian, and Argentinian corn imports approved, no matter which reason you favor for the ban on American corn products, there is little reason to believe China will lift that import ban any time soon Every day it becomes more likely that only a significant and public response from the United States government, or litigation in the World Trade Organization, will open China back up to US corn product imports.

* Lucas Blaustein is the Container/Feed Ingredient Sales and Marketing Manager for CGB Enterprises. He has a Masters of Agribusiness degree from Texas A&M, and a Bachelors of Economics and Chinese Studies from the University of Houston. Lucas has worked in business and academia domestically and in China with major agribusiness companies like PepsiCo and John Deere and he is fluent in spoken and written Mandarin.

Categories: Chinese IP

China’s Forty Hour Work Week Is Mandatory. Except When It’s Not. Part III.

China Law Blog - Thu, 08/07/2014 - 09:35

In parts one and two of this series, I wrote about the “flexible” working hours system as an exception to China’s standard working hours system. China’s labor law and relevant regulations also provide for a second exception: the “comprehensive” working hours system. The latter system applies to three categories of employees who work longer hours because of their particular industries, as follows:

(1)   employees required to work extended hours in the transportation, aviation, railway, shipping, fishing, postal and telecommunications service industries;

(2)  employees subject to seasonal and natural constraints in the resource exploration, construction, salt production, sugar production, and travel industries; and

(3)   other employees in positions that may be suitable for the implementation of the comprehensive working hours system.

Before implementing the comprehensive working hours system, an employer must obtain written permission from the local labor bureau on two fronts: general permission to implement the system, and specific permission for each specific employee designated to work under the system. Once implemented, the designated employees’ working hours will be accumulated over a given period (i.e., a week, month, quarter or year), called a “comprehensive calculation period.” During each such period, the employee’s hours for a month may exceed by up to 36 hours what would have been allowed under the standard working hours system. (In practice, the overtime calculation is even more employer-friendly, as labor bureaus typically define the maximum allowable hours as the employee’s average hours for a month.) Employers who disregard overtime rules risk significant penalties: 150% of an employee’s normal wages for any time exceeding the legal maximum, and 300% of normal wages for such time occurring on a Chinese legal holiday.

The above rules leave several details open to interpretation, and to help clarify matters, in May 2012 China’s Ministry of Human Resources and Social Security issued Draft Regulations on Management of Special Working Hours for public comments. The Draft Regulations introduced the following revisions:

  • Categories (1) and (2) above would be expanded to include the electric power, petroleum, petrochemical, and finance industries.
  • Category (3) above would instead read: “in accordance with the industry policies issued by the State Council with respect to encouraged or promoted industries, the positions that the PRC Ministry of Human Resources and Social Security deems eligible for implementation of the Comprehensive Working Hours System.”
  • The amount of allowable overtime would depend on the length of the comprehensive calculation period. For a period of one week, the maximum overtime permitted per period would be 15 hours (with an additional cap of 36 hours per month). For a period of one month, the maximum overtime permitted per period would be 36 hours. For a period of one quarter, the maximum overtime permitted per period would be 108 hours. For a period of one year, the maximum overtime permitted per period would be 360 hours. In addition, regardless of the period length, an employee could not work more than 11 hours per day, and would be required to have 24 continuous hours of rest every other week.

However, the Draft Regulations are still out for comment, with no end in sight. Unless and until they take effect, the comprehensive working hours system may only be used for employees who fit into one of the three categories listed at the beginning of this post.

Categories: Chinese IP

China Due Diligence. The Most Basic Things To Do.

China Law Blog - Wed, 08/06/2014 - 00:20

Succeeding at doing business in China typically requires a good partner. The odds of having problems with a Chinese company will be substantially lower if you are dealing with a “legitimate” Chinese company. That means it makes sense for you to ascertain that you are dealing with a legitimate Chinese company.

But how do you go about doing that? How can you distinguish between a Chinese company that is legitimate and one that is not?

The following are the basics for making that determination:

  • The first thing you do is ask the Chinese company to send you a copy of its business license. Do not be afraid to do this. Chinese companies do this all the time. If the Chinese company refuses to send this to you, walk away.
  • You then have someone fluent in Chinese and with knowledge about Chinese business licenses examine the one that you have been sent. Our China attorneys typically look for the following:
    • To determine whether it is real or not. This is done by comparing the information on the business license provided with the corresponding information on the relevant Chinese government website — usually the local State Administration for Industry and Commerce (SAIC). If the business license you have been provided is fake, you walk away.
    • To see when the company was formed. We like to compare what the real business license says against what we were told (by email or whatever) and also what the Chinese company says on its English language and  its Chinese language website. If different years are given in different places, we get suspicious and we ask more questions.
    • To see where the company is located. We like to compare this against both what we were told (by email or whatever) and also against what the Chinese company says its English language and its Chinese language website. If there are different addresses in different places, we get suspicious and we ask more questions.
    • To see what the scope of the Chinese business is, as listed on its registration. If the scope is “consulting” and our client thinks it will be ordering five million dollars of widgets from a factory, we get really suspicious. Looking at the scope is a good (though not always fool-proof) way to determine whether you are dealing with a manufacturer or a broker.
    • To see the amount of registered capital. If the amount is too low, the odds are good that it is not a manufacturer. If the amount is really high, the odds are good that this is a big company. Note that this information is not going to be as commonly listed in the future.

Lastly, you should go visit the Chinese company or send someone you truly trust to do so.

Doing the above is not going to be nearly enough due diligence for big deals, but it is usually a relatively fast, relatively cheap way to get a good sense about the Chinese company with whom you are thinking of doing business. The above will not guarantee you a good long-term relationship, but it oftentimes will be enough to let you know whether or not you even wish to attempt to form any relationship at all.

Categories: Chinese IP

China IP: The Video Game?

China Law Blog - Sun, 08/03/2014 - 05:28

The idea that video games can impart real-world skills has been around almost as long as video games themselves. In the forgotten 1984 film The Last Starfighter, a teenager masters a video game and is immediately recruited as a spaceship pilot—because the game was actually the proving ground for an intergalactic defense force. In the 1985 book Ender’s Game, the conceit is taken one step further: a boy genius wins a military simulation, only to learn that he was actually controlling Earth’s armies against an alien force. Meanwhile, the U.S. Army has been successfully using a video game to recruit soldiers for more than 12 years, and the Chinese, no slouches at either video games or cribbing good ideas, followed suit in 2011 with the PLA’s Glorious Mission (光荣使命).

Outside the context of fiction and propaganda, educational games (or serious games, as they are currently called) promise something they rarely deliver: education and entertainment at the same time. Most serious games are didactic to the point of not being fun; in others, the educational content is buried so deep that it barely registers—the gaming equivalent of putting spinach inside a brownie. Some years ago, I wrote about the challenges a Houston company faced in teaching children about healthy eating through video games, and little has changed since then.

I was therefore more than a little skeptical when the EU’s estimable China IPR SME Helpdesk announced they had launched a Serious Game (capitalization theirs) about protecting IP in China. According to the Helpdesk, the game “aims to offer a taste of the experience of doing business in China” and “will allow you to increase your knowledge and awareness about managing intellectual property when entering the Chinese market.”

I give full marks to the Helpdesk for trying something other than the usual litany of webinars, white papers, and blog posts, and to the EU for funding it. And while the game is not going to make anyone forget Grand Theft Auto, it is good enough that once you start, you want to keep playing until you win.

The narrative of the game is simple: you are a European company starting to manufacture and distribute products in China, and your goal is to make as much money as possible. The gameplay proceeds on a narrow trajectory—this isn’t The Sims: Chinese Factory (although that would be an amazing expansion pack)—and you learn quickly that your odds of success are higher if you make the “right” choices.  For instance:

  • If you don’t register your IP before using it, chances are good that someone else will steal it and you won’t have any recourse.
  • If you don’t conduct due diligence on your Chinese partners, chances are good that you’ll end up doing business with a crook.
  • If you don’t insist that the Chinese side sign an NNN Agreement, chances are good that your IP will be stolen.
  • If you trust the Chinese side or an unqualified assistant to write a contract instead of a lawyer, chances are good that the contract won’t protect you.
  • If you have documents translated into Chinese by the Chinese side or an unqualified assistant, chances are good that the translation will have glaring mistakes.

These lessons may seem self-evident, but our firm receives multiple inquiries every week from companies who have done exactly the opposite. Of course, it may be the case that such companies have never heard of either this blog or the China IPR SME Helpdesk until they get into trouble and type “China trademark help” into Google. But that’s a messaging issue. The game gets its point across, and it’s a point well worth making: if you do business in China without using either common sense or the protections afforded by law, you won’t last long. Indeed, we make the same point ourselves on a regular basis, including twice in the past two weeks (see here and here).

My biggest complaint about the game is its lack of robustness. It crashed multiple times on multiple platforms. But after the fifth restart, it struck me: the frustration I was experiencing was the same frustration that occurs when conducting business in China. Perhaps this is not a bug but a feature, and I should give the Helpdesk more credit for subtlety. Anyone who has worked in China knows that understanding the rules only gets you halfway. The rest comes down to perseverance.

(Many thanks to summer interns Emily Hackman and Trang Phan for their able game-testing assistance.)

Categories: Chinese IP

Protecting Trade Secrets in Asia and the United States

Other Chinese IP Events - Thu, 07/24/2014 - 10:29
Start Time:  Thu, 09/18/2014 - 8:30am End Time:  Thu, 09/18/2014 - 2:00pm "Challenges, Opportunities and Future Directions-An International Conference"
Presented by the Center for Intellectual Property, Information and Privacy Law and The Chinese Intellectual Property Resource Center

Date: Thursday, September 18, 2014
Time: 9 a.m.

Basic China Due Diligence. Is This Chinese Company Legitimate?

China Law Blog - Tue, 06/24/2014 - 17:25

I spoke at a seminar last week in Chicago on what companies that source their products from China need to be doing to avoid litigation. Number one on my list was to “choose a good Chinese partner.”  I went on to say that the odds of having problems with a legitimate Chinese company are a lot lower when you deal with a “legitimate” Chinese company. I then talked of how legitimate Chinese companies do not like getting sued and will usually work to avoid that.

Needless to say, an attorney button-holed me to ask the next logical question: “how do you distinguish between a Chinese company that is legitimate and one that is not?”

My answer was along the following lines:

  • The first thing you do is ask the Chinese company to send you a copy of its business license. Do not be afraid to do this. Chinese companies do this all the time. If the Chinese company refuses to send this to you, walk away.
  • You then need to have someone fluent in Chinese and with knowledge about Chinese business licenses examine the one that you have been sent. Our China attorneys typically look at these for the following:
    • To determine whether it is real or fake. We do this by comparing the information on the business license provided to us with the corresponding information on the relevant Chinese government website — typically the local SAIC — State Administration for Industry and Commerce). If the business license you have been provided is fake, you walk away.
    • To see when the company was formed. We like to compare what the real business license says against both what we were told (by email or whatever) and also what the Chinese company says on both its English language and its Chinese language website. If there are different years given in different places, we get suspicious and we ask more questions.
    • To see where the company is located. We like to compare this too against both what we were told (by email or whatever) and also what the Chinese company says on both its English language and its Chinese language website. If there are different addresses given in different places, we get suspicious and we ask more questions.
    • To see what the scope of the Chinese business is, as listed on its registration. If the scope is “consulting” and our client thinks it will be ordering ten million dollars worth of widgets from a factory, we get really suspicious. Looking at the scope is a good (though not always fool-proof) way to determine whether you are dealing with a manufacturer or a broker.
    • To see the amount of registered capital. If the amount is too low, the odds are good that it is not a manufacturer. If the amount is really high, the odds are good that this is a big company.

Doing the above is not nearly enough due diligenc for big deals, but it is a fast, relatively cheap way to get a much better sense about a Chinese company. Just the above is not going to be enough to guarantee a good long-term relationship, but it oftentimes is enough to let you know that you do not even want to attempt a short-term one.

For more on China due diligence, check out the following:

Categories: Chinese IP
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