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China Employees and Independent Contractors: The O2O Business Carve-Out

China Law Blog - 10 hours 15 min ago

Despite the many risks, our China lawyers still see far too many foreign companies engage in pointless gyrations to convince themselves that their relationship with their China “agent” or “independent contractor” or “partner” is anything other than an employer-employee relationship. We know that the costs of hiring an employee in China is high, but you have to trust us when we say that the costs of improperly trying to get around this in China will almost certainly eventually be considerably higher. For just how bad this can get, I urge you to check out this Forbes Magazine article, China’s Tax Authorities Want You.

But now that I have scared you, I should note that China recently opened the door a crack to allow independent contractor like relationships “online to offline” (O2O) world.

In a series of cases concerning ride-hailing service drivers (think Uber or Lyft or Didi), China’s courts have held that the drivers were not employees. In each case, the driver and the company entered into an e-ride-hailing driver cooperation agreement.

Let’s look at one recent case (decided in 2015). The plaintiff, a ride-hailing driver for Beijing Yi Xin Yi Xing Auto Technology Development Service Co., Ltd. claimed he was an employee of Yi Xin and was paid RMB 4000 (about USD 600) per month during the term of his employment, but Yi Xin failed to make social insurance payments and withheld his wages for no good reason and terminated his employment without cause. The former driver initiated a labor arbitration claim against Yi Xin, demanding (among other things) double statutory severance pay for illegal termination of an employee relationship. The former driver lost at arbitration and then took his case to court, where he lost again. The former driver then appealed to the intermediate court and lost yet again.

The intermediate court held that the former driver bore the burden to prove he had been in an employment relationship with Yi Xin and he had failed to meet that legal burden. The court’s analysis is unsatisfactorily brief: it says that in seeking to determine whether an employment relationship existed between the parties, it will consider the following: (1) whether the employer and the employee qualified as employer and employee for purposes of the Chinese labor and employment laws; (2) whether the employee was subject to the employer’s rules and regulations and the labor management of the employer and undertook work arrangements from the employer for remuneration; and (3) the employee’s services constituted a part of employer’s business. The court’s ruling did not discuss (1), but I note it generally means the employer must be a China entity with a business license and the employee must be at least 18 years old. The court went on to say that the parties signed a cooperation agreement, pursuant to which the former driver provided ride-hailing services to clients and charged fees accordingly. Yi Xin then deducted information service fees from the service fees held by the former driver. The former driver worked flexible hours based on his own desires and Yi Xin did not pay him a fixed monthly wage. Therefore, the characteristics of an employment relationship were lacking and no employment relationship existed between the parties. In reaching its conclusion, the court focused on the former driver’s flexible schedule and how he did not take orders from Yi Xin.

In a case currently pending in Chaoyang District People’s Court in Beijing, seven chefs brought a legal action against Lekuai Information Technology Co., LTD for unlawful termination. The main issue in their case is the same as that in the Yi Xin former driver case: did an employment relationship exist between the parties? Much like the arguments made by Yi Xin, the defendant in this case, Lekuai, has claimed that it was in “a cooperation relationship” with these chefs, and not an employment relationship. Lekuai further asserts that the parties had agreed in their written “cooperation agreement” that “there was a business cooperation relationship between the parties” and the chefs would not be subject to Lekuai labor management and the chefs themselves would be solely responsible for its work product.

In July of this year, China published a set of interim provisions on the administration of ride-hailing services, which will take effect on November 1, 2016. The interim rules require ride-hailing companies enter into various “kinds” (whatever that means) of labor contracts or cooperation agreements with their drivers and provide all sorts of training to the drivers. The initial draft of these rules explicitly required the companies sign full-time employment contracts with their drivers, but this requirement has been removed from the official rules set to go into effect in about a month.

We do not see this cases as abrogating the need for foreign companies doing business in China to treat pretty much every individual that performs services for them as an employee, and to pay all of the taxes and benefits that go with that. In any employee-like dispute, China will no doubt continue to favor the individual against the company, and this holds double for foreign companies. But in an O2O context, it certainly appears that China is loosening the employer-employee strings and its courts are no longer treating all situations where employee-like individuals had independence and flexibility as traditional employees. Do note that the courts did not use the concept “independent contractor” as we commonly see in the U.S.

This could be huge. No employment relationship means the company is not obligated to treat the cooperating party as an employee, thereby saving large amounts on labor costs, such as employer taxes, social insurance, and housing fund payments. Termination will also be considerably easier. But what all of this means (if anything at all) for China employers outside of the O2O context remains to be seen.

Bottom Line: If you regulate someone pursuant to your company’s rules and regulations, the chances are an employment relationship exists between you and such employee. But if you are an O20 company and if you have a written contract (in Chinese) that clearly delineates in multiple ways that the role of your cooperating individual is not that of employee, you will have a good basis for claiming that person is not an employee. If you want to be really safe though, you should consider requiring that your cooperating individual form his or her own Chinese domestic company and then have your company contract with that company. As this recent article notes, the number of Chinese domestic companies being formed is rising rapidly as those formations become considerably easier and cheaper.

But whatever you do, do not confuse the above cases with China’s flexible working hours system nor forget that foreigners still need a proper work visas to stay and work in China. Most importantly, if you are going to try to set up a cooperation relationship to avoid an employer-employee relationship, just be sure you are documenting it correctly and in Chinese.

Categories: Chinese IP

Hiring Foreign Employees in China

China Law Blog - Sat, 09/24/2016 - 09:07

Hiring a foreigner in China usually requires all of the following be true:

  • The candidate is in good health and over the age of 18
  • The candidate possesses the skills and work experience required for the job
  • The candidate has no criminal record
  • The candidate has a specified employer
  • The candidate holds a valid passport or any other valid travel document in lieu of passport

Note though that the local rules need to be consulted and, like everything else regarding China employment law, they can vary by locale. For example, some municipalities require a different number of years work experience. And there are almost always exceptions to the general rules. For example, even though most places impose an upper limit on the candidate’s age, many allow exceptions for candidate that satisfy certain other conditions. Adding to the confusion and the difficulty in getting things right, in some places many (sometimes most or all) of the local rules and exceptions are not available to the public and the only way to know what you as an employer can or cannot do is to “hash it out” by talking with the relevant authorities. In other words, if you really want to hire an employee who does not satisfy the requirements listed above, you should absolutely not give up.

Employers generally need to follow the following steps to bring on a foreigner as an employee. First, the employer must obtain an employment license from the local labor authorities and then secure a work visa invitation confirmation letter from the relevant foreign affairs office. With that letter, the employee may then apply for a work visa at the Chinese Embassy in the employee’s home country. Upon arrival in China, the employee must obtain (1) an alien employment permit from the relevant labor authorities and (2) an alien residence permit from the relevant public security department. Note that these permits need to be updated periodically.

A company that employs a foreigner must do so via a written employment contract and that employment contract should accord with applicable national, provincial and local laws and regulations. For example, most places require the contract term for a foreign employee not exceed 5 years. I know this sounds obvious, but do not have your foreign employee start working before he or she has secured the proper visa. Wait until you have all the necessary paperwork in place, NOT just after you have a signed employment contract. Before too quickly can cause your employee to be fined, lose his or her job, or even to be deported. The employer can be hit with a much larger fine and be ordered to bear all costs in connection with removing the illegal worker. Serial violators can even lose their ability to hire foreigners under any circumstance.

Beginning in 2014, China started drafting a regulation called the Provisions on the Administration of Foreigners Working in China, which is intended to focus on attracting more foreign talents into China. The goal is to replace the current Provisions on the Employment of Foreigners in China, which was promulgated by the Ministry of Human Resources and Social Security in 1995 and recently amended in 2011. Note the interesting change of words from “employment” to “working.” This is intentional and was done to deal with how foreign self-employed individual can legally work in China, not just be employed. The rule is not universal in China on this issue. There is nothing in Chinese law specifically prohibiting a foreigner from conducting business as a self-employed individual (except for residents from Hong Kong, Taiwan and Macau, who are explicitly permitted to do so). However, some places, such as Beijing, explicitly prohibit a foreigner from doing so and registering such a business in those places is impossible. I will not be holding my breath waiting for this new set of regulations to come out, but when and if it does, we will — of course — let you know.

For more on the hiring of foreign employees in China, check out the following:

Categories: Chinese IP

Quick Question Friday, China Law Answers, Part XXX

China Law Blog - Fri, 09/23/2016 - 05:58

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.

Our China attorneys are often asked some version of the following question:

I’m making a low-budget independent movie set in China. Can I just take my cast and crew to Xi’an on tourist visas and film a movie without bothering with permits?

Our answer:

It is illegal for foreigners to engage in film production in China by themselves. Full stop. Guerrilla filmmaking may have a certain romantic appeal, but things get a lot less romantic when viewed through the bars of a prison cell. Or when you lose all your footage and equipment and have to pay a substantial fine. Maybe you’ll get away with it, but is it really worth putting you, your cast, and your crew in harm’s way? Independent films may be inherently risky, but that’s because most of them lose money, not because making the movie is dangerous. Unless you’re making a movie with Werner Herzog in the Amazon. (When Klaus Kinski is in the mix, all bets are off.)

Note also that although changes have been proposed to the laws and regulations governing film production in China, those changes will not change anything about foreigners seeking to film in China.

Categories: Chinese IP

TPP: The Full Text, Oh and China Too

China Law Blog - Thu, 09/22/2016 - 09:39
Leaders of the TPP countries. What no China?

Far too many on Facebook and Twitter keep describing the Trans-Pacific Partnership as a “secret” document and then use that as a reason for opposing it. Go ahead and oppose TPP — that’s your right — but it is factually wrong to claim it is a secret document as you can find its full text right here on the Office of the United States Trade Representative’s website.

And if the straight text is not enough for you, or if you are interested in how the TPP (if it passes, which is looking increasingly unlikely) will impact China businesses and foreign companies doing business in China or with China, check out the following:

Categories: Chinese IP

Importing Goods From China: The Risks Are Rising

China Law Blog - Wed, 09/21/2016 - 08:40

Last month I wrote about how importers from China need to be on their guard since U.S. Customs and Border Protection (CBP) has implemented new regulations to investigate allegations of antidumping (AD) and countervailing duty (CVD) evasion. See Importing From China: One More (New) Thing You Need To Know.

It didn’t take long, as U.S. Customs has already begun its first wave of investigations: Wheatland Tube, a US steel pipe producer, on September 14, 2016 announced it had filed with CBP an allegation of duty evasion on imports of Chinese circular welded steel pipe.

CBP has published a timeline for conducting its investigations and a process diagram (EAPA Investigation Timeline) and this newly filed allegation will be a test case to see how CBP will conduct its new duty evasion investigations. Hopefully, CBP will soon address many of the questions raised by the new regulations. How will parties be allowed to participate? What information from the investigation will be made public? How will CBP define “reasonable suspicion” of duty evasion?

This steel pipe investigation is likely to be the first of many CBP duty evasion investigations that are to come, many (probably most) of which will target Chinese products subject to AD/CVD duties. For how to figure out the risk quotient for the products you import from China, check out China Imports: Know Your Risks.

The new antidumping and countervailing duty regulations will unquestionably require an increased number of importers and foreign manufacturers to formally respond to CBP’s questions in response to allegations. Given the strong political pressure by domestic U.S. industries calling for tougher enforcement of US trade laws (not to mention the rising opposition to free trade among the American populace), Chinese producers and exporters and US importers should be prepared for increased CBP activity. CBP is likely looking to punish someone hard to set an example of their improved enforcement.


Categories: Chinese IP

Eight Keys for Navigating China’s Employment Laws

China Law Blog - Tue, 09/20/2016 - 05:58
Eight keys for navigating China’s employment laws

It is far cheaper in the long run to avoid China employment law problems than to have to deal with one that has arisen. If you follow the following eight rules, your chances of having a China employment problem will markedly decrease.

1.  Use written employment contracts. China’s employment system is a contract employment system. This makes it a very different system from the United States, where U.S., employers can terminate employees pretty much at any time and for any reason. The U.S. system is called employment at will. China is most assuredly not an at-will employment jurisdiction, and American companies often get themselves in legal trouble in China for failing to realize this. As a China employer, you must have written employment contracts with all of your full-time employees.

China employers without a written employment contract are exposing themselves to penalties, administrative fines and the risk of being deemed to have entered into an open-term employment contract with their employees, which essentially means no definitive end date to the labor relationship.

If an employer goes more than a month (note that this period is shorter in some municipalities) without having a written employment contract with an employee, the employer will be required to pay its employee double the employees’ monthly wage. In addition to having to paying double the employee’s monthly wage, the employer must immediately execute a written employment contract with the employee.

If an employer goes more than a year without having a written employment contract with an employee, the employee lacking the written employment contract will be deemed to have entered into an open-term employment contract with his or her employer. Such a contract generally means the employer must retain the employee until his or her retirement age. As explained below, once an employee has completed his or her probation period, it is very difficult to terminate the employee during the term of the employment contract. It is even more difficult to terminate an employee on an open-term contract.

2. Put the mandatory provisions in your China employment contracts. China’s Labor Contract Law mandates that employment contracts contain the following provisions:

  • Basic information about the employer and the employee (the employer’s name, address and legal representative or person-in-charge, and the employee’s name, address and national ID/passport number)
  • The explicit term/duration of the employment contract (and any probation period)
  • A description of the work the employee will be performing
  • The place of work
  • The working hours
  • Rest and leave time
  • Salary
  • Social insurance
  • Applicable labor protections and labor conditions and protection against occupational hazards
  • Other matters required by relevant laws and regulations

Many locales also require employers put additional provisions in the contract, and in addition to what is mandated by law, employers generally should be sure to include provisions describing any additional benefits they provide to particular employees,

3. Be clear with the term of your employment contracts and your probation periods. It often makes sense to include in your employment contract with any new employee a probation period to give the employer (mostly) and the employee time to test each other out. Generally speaking, the longer the initial employment term, the longer the probation period may be. The general rule is that for employment terms of more than three months but less than one year, you may set a probation period of no more than one month; for employment terms of more than one year but less than three years, the probation period cannot exceed two months and for employment terms of more than three years or for an open-term employment arrangement, the probation period cannot be longer than six months. You may use only one probation period for the same employee.

Since it is difficult to terminate an employee who has completed his or her probation period, we usually recommend an initial term of three years because that allows you to provide a six month probation period (the longest period permitted under Chinese law), during which time you can relatively easily terminate an employee.

This approach also makes sense because in most places in China the employee will automatically be converted into an employee with an open contract term when you re-hire the employee pursuant to a second fixed term contract. Terminating an employee on an open term contract is much more difficult than terminating one on a fixed term. Having a long probation period will delay the onset of the open term period so you can take advantage of this period to determine whether you should convert the employee to a lifetime employee.

But just like pretty much everything having to do with China employment law, the general rule is just that; it is not the right way to go in every circumstance since every company is different, every employee is different, and, most importantly, China’s employment laws vary by jurisdiction. See China Employment Law: Local and Not So Simple.

4. Know China’s working hour rules. In China, most municipalities enforce an 8-hour work day and 40-hour work week, which is called the standard working hours system. There are two primary exceptions to this system: the flexible working hours system and the comprehensive working hours system. The flexible working hours system is akin to the U.S. salaried employee system and applies to certain categories of employees such as senior management and sales personnel. The specific categories of eligible employees are defined in local rules. The flexible working hours system can benefit employers needing greater employee hour flexibility, without having to pay overtime every time one of their employees works outside the basic hours. Under the comprehensive working hours system, employers may have their employees work beyond eight hours a day or 40 hours a week without having to pay overtime wages, however, the total working hours over a given period must not exceed the applicable limit under the standard working hours system.

But with very limited exceptions, before a China employer can implement either a flexible working hours system or a comprehensive working hours system, it must secure prior approval from the local labor bureau and such approval does not last indefinitely: you need to submit an application for renewal before the expiration of the term specified in the government approval letter.

Regardless of which working hours system you as a China employer choose to implement, the safest approach (to avoid having to pay overtime) is not to have any employee work on Chinese national holidays, if at all possible.

5. Know China’s rest time and vacation rules. Every employee will have two rest days, typically Saturday and Sunday.

Employees who have worked continuously for one year are entitled to paid annual leave. The statutory vacation period, based on the employee’s total years of service (with anyone, not just for you), is as follows:

  • More than 1 and less than 10 years service: 5 days vacation
  • More than 10 and less than 20 years service: 10 days vacation
  • More than 20 years service: 15 days vacation

Employers are required to make arrangements for employees to take vacation time each year. Unused vacation time in one year may be carried over to the next year, but not beyond that one year. An employer who fails to allow an employee to take annual leave must pay that employee 300% of the employee’s daily wages for each unused vacation day. And trust us when we tell you that Chinese employees are well aware of this law and they virtually always seek the 300% owed to them (and more) when they leave your employment.

6. Get clear on your salaries. Your written employment contract must set forth a salary. One issue to consider is whether to pay a 13th month in salary, which is customary in many parts of China, and is typically paid out before the Chinese New Year. This 13th month of salary is not required, but if you decide to do it, you will want to specify clearly and in writing the conditions for receiving this 13th month of salary or you may have to pay this bonus forever even though you wanted to preserve your option to do otherwise.

It also makes sense for you to determine early on whether you are going to pay this extra month because many a foreign company doing business in China has felt compelled to add this 13th month only after calculating their expenditures based on a 12 month system. If you are going to have a bonus system for your employees, you should set out its parameters in the employment contracts. For example, instead of paying a higher salary but no annual bonus, you may want a lower salary structure with an annual bonus which is usually paid in the early part of the following year. This will add no cost to you, but your China employee can benefit from the preferential tax treatment on his or her annual bonus, which means less individual income tax burden for the employee.

7. Get clear on social insurance and housing fund payments. As a China employer, you must contribute to social insurance (which usually includes pension, medical, work-related injury, maternity and unemployment insurance) and to the housing fund for all your China employees. The exact type of social insurance you must pay depends on the local rules. Whether this contribution must be made for your expat employees will depend on the local requirements at your (the employer’s) location. Do not make the common mistake of paying for your expat employees’ social insurance when you do not have to do so or the equally common mistake of failing to pay for your expat employees’ social insurance when you are required to do so, as both mistakes can be very costly.

8. Use Chinese as your employment contract’s governing language. We recommend making clear in your employment contracts that Chinese is the governing language, rather than using a dual-language contract. The advantage of a one-language contract is that it eliminates costly disputes between the two “official” languages which happens pretty much every time with dual language contracts. Equally importantly, it makes things clearer for both you and your employees. Nonetheless, even though the English language portion is not an official version, we still draft our China employment contracts in English as well so that our clients who do not read Chinese can figure out what it says both when we draft it and in the future.

Categories: Chinese IP

Getting Your China Products Through U.S. Customs: The 101

China Law Blog - Mon, 09/19/2016 - 05:58

If you are importing products from China you need to do your homework to make sure your incoming shipments into the United States comply with U.S. Customs laws and regulations. Compliance with U.S. Customs laws and regulations is critical in avoiding your shipments being detained or seized, and/or penalties assessed. Common issues importers of products from China typically face include the following:

  • Not determining proper classification and duty rate for products. If you plan to import and sell on a Delivered Duty Paid basis, you should consider customs duties in your costs and that means you should know all of your applicable duty rates before you import.  Also certain products are subject to high antidumping or countervailing duties in addition to regular customs duties, which may be as high as 300%.
  • Failing to mark the product with the country of origin of manufacture. Generally goods of foreign origin for import into the U.S. or immediate containers of the goods must be marked legibly and in a conspicuous location with the country of origin in English. Failure to do so accurately can result in civil and even possibly criminal penalties.
  • Not properly marking wood packing material. All wood packing material for products imported into the U.S. must be properly treated and marked prior to shipping. Failure to meet the treatment and marking requirements may cause shipments to be delayed and penalties issued.
  • Failing to provide complete commercial invoices. Customs regulations provide that specific data must be included on the commercial invoice for U.S. Customs purposes, including a detailed description of the merchandise, and correct value information. Omission of this information may result in improper declaration to U.S. Customs at the time of import and expose you to penalties.
  • Failing to meet other U.S. Government agency requirements. Goods imported for sale in the U.S. must satisfy the same legal requirements as those goods manufactured in the United States. U.S. Customs enforces the laws of other agencies in the U.S., including, the Food and Drug Administration, the Consumer Product Safety Commission (CPSC), and the Environmental Protection Agency, in addition to others. Therefore, if toys, for example, are exported to the U.S., detailed CPSC requirements, including for testing, must be met prior to export.
  • Distribution of many trademarked and copyrighted items. Items which are trademarked and copyrighted are restricted by contractual agreements that give exclusive rights to specific companies to distribute the product in the U.S. Imports of improperly trademarked or copyrighted items can be seized at the U.S. border and can subject you as the importer to penalties.

Taking the time to identify the required U.S. Customs laws and regulations for the products to be shipped to the U.S. from China will help you maintain seamless delivery of your merchandise to U.S. customers and avoid civil and criminal penalty exposure.

Categories: Chinese IP

China Employee Discipline: Your Rules and Regulations are Just a Starting Point

China Law Blog - Sun, 09/18/2016 - 05:58

Every employer in China should have its own set of Rules and Regulations because without one you will have an extremely tough time terminating a China employee.

Many companies doing business in China have learned the hard way that terminating a China employee is not easy. Recognizing this many foreign employers in China now have a Rules and Regulations document and most have even translated this document into Chinese for their China employees. This is a good start but it may not be enough. Here are a few additional basics you should bear in mind if you are going to employ anyone in China.

Your Chinese-language Rules and Regulations need to be a lot more than just a mere translation of the employee manual you use in the United States, Australia and/or Europe. It needs to be tailored for your China employees in your business. And just as is true for any legally important document, literal translations  do not work. You need a document that all your employees could understand as the Rules and Regulations usually apply to everyone in the company, not just to your expat employees. This is not just about being culturally conscientious: the Chinese language version of your Rules and Regulations needs to be clear enough to form the basis for your being able to terminate your employees.

You need to make sure your employees actually receive a copy of your Rules and Regulations and that you have prove that they did so. If you ever get into a dispute with one of your Chinese employees, there is a good chance he or she will claim never to have received a copy of your employer Rules and Regulations. Your best counter to this argument will be to provide the arbiter with a Chinese language signed acknowledgement of receipt form, proving that your employee got a copy of your Rules and Regulations.

If we could only name one section that you absolutely must have in the Rules and Regulations, it would be the section on disciplinary actions. What employee misconduct triggers punishment? Make sure your Rules and Regulations make clear the grounds for terminating an employee. Think hard about the misconduct that could be committed by your employees and put those actions in your Rules and Regulations as being subject to discipline or termination. Without this section, your employee can do terrible things that harm your business and yet you will likely find yourself without a basis to discipline or terminate the offending employee.

Far too often foreign employers make the mistake of filling their Rules and Regulations with mission statements and incentives and things they encourage the employees to do. This is all nice to have, but it misses the point of having Rules and Regulations, which should have very different goals from an employee handbook. Your Rules and Regulations should set forth the rules on how you manage and oversee your employees. It is the governing law for your organization. This is why Rules and Regulations are generally negative in tone; it sets forth what you do not want your employees to do so that you can discipline them if they do these things.

But not only do you need a china-focused set of Rules and Regulations, you also need to give your employees opportunities to comment on or question your Rules and Regulations and stay on top of addressing those comments and questions. If you fail to address an employee’s concerns about your Rules and Regulations, or even if you fail to clarify those Rules and Regulations in response to a question, you can be at risk for your actions being deemed unreasonable and disproportionate. Your action can more easily be called into question, which could lead a court to order you to pay some statutory severance to your terminated employee or, even worse reinstate the employee.

If the time comes where you need to discipline one or more of your employees pursuant to your written Rules and Regulations, you now need to make sure that your discipline is pursuant to your own Rules and Regulations and that your employee knows that he or she has been disciplined. It is not uncommon for China employees to claim that they never received your discipline decision. This is of particular importance when your employee commits a minor wrongdoing and then starts escalating with his or her offenses. If you cannot show that you previously disciplined your employee for his or her past offense(s), you may not be justified in terminating the employee for being a repeat offender? Put it on paper every time you issue a warning. We advice our clients to hand deliver their discipline notices to their employees with a witness there to record it. In addition, use email and require confirmation and/or an outside courier service that requires a signature for the delivery. If you have an internal procedure for appealing disciplinary actions, follow that procedure.

Categories: Chinese IP

China Imports: Know Your Risks

China Law Blog - Sat, 09/17/2016 - 05:58

Every year U.S. producers file 10-15 petitions asking the U.S. government to investigate whether certain products imported into the US are sold at unfair prices (antidumping or AD) or are unfairly subsidized (countervailing duty or CVD). Many of the AD/CVD cases target products imported from China. Odds are good that at least two new AD/CVD petitions will be filed by Halloween and as many as five by year end.

Our clients often ask our international trade lawyers how they can determine the likelihood of a AD/CVD petition that could adversely affect their ability to compete in the US market. Each AD/CVD petition is unique to the product and industry it covers, but most of AD/CVD investigations fall within a handful of categories. Understanding what has led to the filing of previous AD/CVD petitions can help you as a producer, exporter, or importer, recognize if and when to expect a new AD/CVD petition that could directly affect you. The following are some of the indicators you should be checking to determine whether your imported into the USA product will be next.

The Regulars. Certain domestic industries have been frequent filers of AD/CVD actions. Companies in these industries are veterans of AD/CVD actions; they don’t ask if a new petition will be filed, only when it will be filed.

  • Steel of all types (carbon steel, stainless steel, flat products, pipe, rebar, wire rod, wire, etc.) from all over the world. The latest wave of steel AD/CVD investigations are being completed with high AD/CVD margins in most cases.
  • Softwood Lumber from Canada. The latest round of the US-Canada Lumber wars is set to begin as new AD/CVD petitions are likely to be filed in October 2016. Filing a new AD/CVD petition may be necessary to push US-Canada negotiations to a meaningful level.

The Big Box Effect. When Walmart, Lowes, or Target switch their sourcing of a product from a domestic manufacturer to a foreign (read Chinese) one, it is quite common for the jilted domestic supplier to file an AD/CVD petition in an effort to save their business. Boltless steel shelving units, wood flooring, ironing tables, and candles are all examples of this, and all involving products from China.

US Products Squeezed by Imports. It is not uncommon for an AD/CVD petition to be filed by a US producer that makes a higher quality product but is starting to lose out to foreign producers with lower quality but cheaper products. Frozen shrimp from multiple countries, garlic from China, and wooden bedroom furniture from China are some examples of this.

Pressure from Downstream Customers. Many AD/CVD petitions involve products that are material inputs used to make a downstream finished product. Petitions can be triggered by larger downstream producers switching to, or just threatening to switch to imports to pressure smaller upstream suppliers to lower prices.  Many chemical products from China, tire products from China and other countries, kitchen racks from China are examples of this.

AD/CVD Actions on Upstream ProductsSometimes AD/CVD actions filed by other domestic industries trickle down and harm downstream domestic industries. For example, US wire rod producers filed AD/CVD petitions that resulted in AD/CVD duties against imported wire rod. But these wire rod duties ended up hurting US wire producers, who in turn filed their own AD/CVD duties against imported wire.

Dying Dinosaurs/Last Survivors. Some AD/CVD petitions are filed by the remaining members of a nearly extinct domestic industry dealing with decreasing demand and increased import pressure. Sometimes the AD/CVD actions allow the surviving US producers to stay in the US market protected from import competition.  Examples of this are wooden bedroom furniture and innersprings from China.

Other Countries’ AD/CVD actions. The US is not the only country that acts to protect its domestic industries from unfair foreign trade. AD/CVD actions filed in Canada, India, the EU, Brazil, and even China are warning signs of industries facing tight competitive pressure. Imports blocked from one market are often diverted to other available markets. A primes example of this are products from China which first had AD/CVD filed in the EU before the US took action.

All of the above scenarios are good indicators of of an imminent filing of a new United States’ AD/CVD petition, so if you are seeing these market conditions in your industry, an AD/CVD petition in your near future.

Categories: Chinese IP

Quick Question Friday, China Law Answers, Part XXIX

China Law Blog - Fri, 09/16/2016 - 05:58

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.

Our China attorneys are far too often are asked the following, usually with the following sort of lead-in:

The owner of this Chinese company has become like a brother to me. Whenever I go to China, we go out to dinner together and then drinking. He even invited me to his daughter’s wedding. Do I really need a contract with his company?

Our answer: yes.

And if we really need to explain why, then you have not been reading this blog and you either just have to trust on this or go back and read it.

Categories: Chinese IP

China Part-time Employees: The 101

China Law Blog - Thu, 09/15/2016 - 05:58

As a China employer, you should you have a written employment contract with your part-time employees, even though Chinese labor laws do not require it, for the reasons set forth below.

First, the rules in your locale (e.g., Shanghai) may require you to have a written contract if your part-time employee requests one, so you may as well be prepared. Being able to present a contract to your potential hiree shows you are prepared and know how things work in China. If your employee becomes convinced that you (a foreign employee) don’t know how Chinese employment laws work, you could be setting yourself up for future problems. Chinese employees file more grievances against foreign employers than their Chinese counterparts, especially against those they perceive as not understanding China.

Second, a written contract can be used to make your part-time employee’s work responsibilities and obligations clear. Performance issues are more likely to arise when your employee is unclear on what he or she has been hired to do.

Third, written contracts are the best way for you to protect your confidential information, trade secrets and intellectual property from exposure by your employee, part-time or otherwise. A written contract and an enforceable damages clause written to deter your part-time employee from stealing your IP, trade secrets or confidential information can go a long way towards preventing your employee from taking these things to his or her next employer.

But if it’s not done right, a written employment contract can actually backfire. For example, 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 and most municipalities enforce this. So if your contract with one of your part-time employees provides that he or she must work 35 hours a week, you are at risk of converting that employee to a full-time employee. And that now full-time employee could sue you for all the unpaid social insurance benefits you were supposed to pay but never did and the labor bureau almost certainly will also fine you for having failed to make mandatory social insurance contributions. Or even worse, it can suddenly become incredibly difficult or even impossible for you to terminate your employee because not only did your bad contract convert your employee to a full-time worker but it also was an open-term contract. See China Employment Contracts: Ten Things To Consider.

If you have any part-time employees or if you plan to hire any part-time employees, you also probably should add a section to your rules and regulations regarding such employees. The reason for this is simple: China-based employers must provide all of its employees with a copy of the employer rules and regulations and all of its employee will be subject to these rules and regulations. If you don’t make clear that certain company benefits are not available to your part-time employees, you are setting up your part-time employees to believe and then to argue that they are entitled to those benefits because your rules and regulations essentially say that they are. You also should make sure that your rules and regulations do not opt your part-time employees out of any mandatory benefits to which they are entitled, such as work-related injury insurance. Lastly, you should be sure to to follow all of the formalities and make all of the filings required by your local labor authorities.

Bottom line: Part-time employees have their own special issues in China and you ignore them at your peril.

Categories: Chinese IP

Negotiating with Chinese Companies Part II: the Devil is not in the Detail

China Law Blog - Wed, 09/14/2016 - 06:35

In this series of posts I am looking at themes explored by Lucian Pye in his work Chinese Commercial Negotiating Style and how they relate to negotiating with Chinese companies. Pye concludes that most Sino-American negotiations are initiated in a way that helps the Chinese side achieve its preferred strategies and tactics. My first post, Contract Preliminaries and Courtship Rituals, looked at how Chinese companies tend to control the preliminaries during what I have called the “courtship” phase. In this post we will see what Pye has to say about the Chinese tendency to prefer agreements on generalities.

Pye observes that Chinese culture traditionally shuns legal considerations and instead stresses ethical and moralistic principles. By contrast, Westerners are thought to be highly legalistic. The Chinese tend to reject the typical Western notion that agreement is best sought by focusing on specific details and concrete matters while avoiding discussions of generalities or rhetoric. The Chinese prefer to agree on general principles before dealing with details. They can, Pye says, be tenacious in holding to their principles but surprisingly flexible about details. The Chinese focus is on the “spirit” of the deal. Agreement on principles usually takes the form of letters of intent or protocols, the purpose of which often mystifies the Westerner. The Chinese attach great importance to symbols and symbolic matters. Symbols such as the spirit of the agreement have a reality for the Chinese and there is a distinct Chinese bias in favor of the publicity or “face” these symbols can generate.

The Chinese, Pye says, conceive of their business relationships in longer and more continuous terms than Westerners. They expect an agreement to set the stage for a growing relationship in which it will be proper for the Chinese to make increasing demands. A proclivity for seemingly unending negotiations can even make the Chinese insensitive to the possibility that “canceling” contracts may cause trouble in the relationship with the foreign party. From the Chinese perspective, nothing about a contract is ever final. Westerners usually think a contract will provide for a given period of fixed and predictable behavior but the Chinese look for continuous bargaining and regard this bargaining itself as suggesting an enduring relationship. For Westerners there can be a great deal of give and take before agreement is reached, but afterwards the expectation is that neither party should lean on the other to seek further advantages. For the Chinese, the very achievement of a formalized agreement, like the initial agreement on principles, means that the parties now understand one other well enough that each can expect further favors. They will therefore not hesitate to suggest changes immediately on the heels of an agreement. They tend not to treat the signing of a contract as signaling a completed agreement.

Pye advances several explanations for the Chinese tendency to seek early agreement on general principles. First, he says, it is easier to extract concessions when details are to be worked out later on. Second, agreement on principles can easily be turned into agreement on goals. This can in turn support a later insistence that all discussion of concrete issues must support these goals. Finally, Pye says, agreement on general principles can be used later to substantiate tactical claims of bad faith.

More on tactics in the next post in this series.

One final point: Pye never moralizes or suggests there is anything wrong with the Chinese approach. He merely points out how different it is from the typical Western approach, leaving readers to conclude that foreigners ignore or disregard the Chinese negotiating tactics at their own peril. This is certainly consistent with our view that one should not rush to blame the Chinese when things go wrong.

Categories: Chinese IP

Negotiating with Chinese Companies: Contract Preliminaries and Courtship Rituals

China Law Blog - Tue, 09/13/2016 - 07:20

In the early 1980s the US Air Force commissioned Lucian Pye, an eminent sinologist, to write a report on how Chinese negotiate with foreigners. Published in 1982, it was called Chinese Commercial Negotiating Style.

A friend of mine recommended Pye’s work to me recently, saying he wished he had read it twenty years ago when he first started working in China. Based on extensive interviews with Americans engaged in China trade, Pye’s paper analyzes the negotiating style Chinese use with American businesspeople. To control for American cultural bias, Japanese traders were also interviewed. Pye’s overall conclusion was that the way most Sino-American negotiations are initiated usually sets in motion a process that helps the Chinese side achieve its preferred strategies and tactics.

Though some of Pye’s political and economic observations are, quite understandably, now rather dated, I was nonetheless struck by his report’s enduring relevance and, like my friend, I now recommend it to anyone interested in doing business with China. To merely summarize his work would be to do it a disservice so I have attempted to draw out some of his major themes and look at them in a series of posts. His first theme is Chinese mastery of contractual preliminaries.

In Pye’s view, foreigners often follow the historical practice of coming as guests seeking permission to do business in China. This naturally casts them in the role of supplicants asking for Chinese beneficence. They are visitors from afar and their hosts call the tune on the procedures and the timing of meetings. Problems associated with visas, invitations and access to officials or business leaders contribute to foreign anxiety about “doing the wrong thing” when doing business in China. So when problems arise, the foreigners are prone to suspect they are somehow at fault. In this way, the Chinese hosts gain the advantages of surprise and uncertainty in agenda arrangements.

According to Pye, the Chinese tend to limit preliminary exchanges to generalities so as to size up the foreign party and to determine its vulnerabilities, especially any lack of patience. At the same time, foreign business leaders tend to jump straight in.The novelty and status associated with visiting China frequently compel foreign CEOs to be the first to engage in talks with the Chinese, without waiting for subordinates to prepare the ground. The graciousness and bountifulness of Chinese hospitality can make the foreign company feel awkward to be too businesslike. Consequently, foreigners tend to be very obliging in following the Chinese practice of seeking initial agreement on very general principles, without clarification on the specific details. Much of what occurs at the preliminary stage has a tacit quality and foreigners frequently misjudge their progress. In taking this approach, Pye says, foreigners violate one of the first principles of negotiations and diplomacy — summit meetings should never take place without extensive preliminary spadework by subordinates.

When mid level executives are later sent in to work out the details of a contract they usually discover that the Chinese want to rely on the agreed “principles” that were put in place by the CEO. Such principles were often taken by foreigners to be no more than ritual statements but the Chinese tend to use them to practical advantage by suggesting the other party has not lived up to their “spirit.” See China LOI and MOU: Don’t Let Them Happen to You. Instant authorities on China, these CEOs return from their initial visits to report success, saying they found the Chinese to be cooperative and gracious. The mid level executives (and the China lawyers) tasked with working out details then come under great pressure. They are constrained to avoid acting in ways that might irritate the Chinese and spoil relationships established by the boss. So, when the big guns are sent in first the foreigners lose the advantage of dispatching their highest people for critical negations at the consummation of the deal. Their second appearances must now be limited to generalities where civilities prevail.

I found Pye’s observations both persuasive and broadly consistent with my own experience. Having said that, he is clearly more concerned with the affairs of government and large corporations than he is with SMEs or creatives who may not have support available from a middle level of management or administration. The pitfalls Pye identifies can be minimized, he says, if foreigners recognize that in the initial stages of negotiations, the Chinese usually only want highly generalized in-principle agreement to the effect that a relationship is possible.

In my next post I will look at what Pye has to say about Chinese attitudes to contract formation.

Categories: Chinese IP

A China IP Reality Check, Part 3

China Law Blog - Sun, 09/11/2016 - 08:28

Previously on China Law Blog…

In Part 1 of this three-part series, we discussed the background of the Talpa-Canxing dispute over The Voice of China. In Part 2, we discussed what happened after Canxing broke Talpa’s heart. Now, in the thrilling conclusion, we discuss some of the things you can and should do if you are licensing content in China and wish to avoid Talpa’s fate.

As a preliminary matter — before you license anything to anyone in China — you should register, in China, any of your intellectual property worth litigating over. That means registering not only your English-language trademarks but also the Chinese-language versions of those trademarks. If the Chinese-language versions don’t exist, it’s time to create them. Because if you don’t, someone else will, and they’ll register it too — just like Zhejiang Television did with 中国好声音, the Chinese version of The Voice of China.

That also means registering copyrights for any meaningful content. For television shows, that means at the very least registering the show bible, scripts, and any produced episodes. It’s true that China is a signatory to the Berne Convention and therefore a valid copyright in the US or Europe is valid in China without registration, but for practical purposes, it’s much easier to enforce a copyright in China if you have registered it in China.

Do not delegate the task of registering your IP in China to your Chinese licensee. The licensee’s interests may not always be aligned with yours.

Once you have registered your IP in China, you should draft an enforceable contract to protect your interests in China as against the Chinese licensee. A contract with the licensee’s Hong Kong affiliate, with disputes resolved by arbitration in Hong Kong (or any other country other than Mainland China), achieves none of these goals. Yet this is what we see again and again from companies who either don’t trust or don’t understand the Chinese court system. I haven’t seen the Talpa-Canxing contract but it appears to have followed this model, as the dispute was submitted to arbitration in Hong Kong. The problem is usually not that Chinese law won’t protect foreign content owners. The problem is usually that content owners (and their lawyers) often decline to take advantage of the protection Chinese law offers. They write contracts designed to be unenforceable in China, and then complain about China’s legal system when their contracts prove to be worthless.

A properly drafted contract would address the following issues:

1. Make sure that the contracting party on the licensee side is the actual Chinese entity that will be licensing the content, and not a Hong Kong affiliate. As a corollary, choose the right law and the right jurisdiction for your dispute. If you want to sue a Chinese company for breaching your contract by using your IP in China, choose Chinese law and dispute resolution via Chinese courts in the hometown of the Chinese licensee. See China Contracts: Make Them Enforceable Or Don’t Bother and China Contracts. Watching The Jurisdictional Sausage Get Made.

The issue with contracting with a Hong Kong company is not so much that the Hong Kong company may be a shell company with no assets (although that is often the case). Rather, the issue is that any legal resolution in Hong Kong is unlikely to be effective in China. And if you’re licensing content to China, China is where the action is going to be. Hong Kong still has the common law system passed down from its days as a British colony; it favors injunctive relief and disfavors liquidated damages (aka contract damages). China is the opposite. What good is injunctive relief in Hong Kong if you’re trying to get the judgment enforced in China, which disfavors injunctions? You might argue: we will arbitrate in Hong Kong but provide that Chinese law governs. For a variety of reasons that almost never works, particularly if the defendant is a Hong Kong company. Meanwhile, the infringement in China continues.

2. Provide for upfront payment of the license fee in an amount that makes the deal worth it to you even if the contract is terminated early. See China Licensing Agreements: The Extreme Basics. Provide for substantial contract damages for late or non-payment of the license fee, and do not provide the Chinese side with any of your content until it has paid the license fee and the funds are in your bank account.

3. Provide for substantial contract damages for (1) early termination and (2) each instance of infringement. Do not mess around with lengthy provisions about injunctive relief. Unlike the common law systems of the United States, Canada, Great Britain and Australia, contract damages are not disfavored under Chinese law. In fact, use of contract damages is well established in China and favored by statute. On the other hand, though Chinese judges may be legally empowered to issue injunctive orders, they have virtually no power to ensure those injunctions are implemented. There is no Chinese equivalent of the U.S. Marshals Service. For this reason, Chinese judges are hesitant to issue an order they know is likely to be ignored. Instead, they will seek to convert every decision to an order to pay a sum certain in damages. Including a contract damages provision gives a China judge the roadmap. Most importantly, since Chinese companies know well the power of contract damages provisions, your merely having one in your contract greatly increases the odds of your Chinese counter-party abiding by that contract.

4. The contract damage amounts must be a good faith estimate of the actual amount of income that would be lost by the licensor in the event of early termination. These amounts are not guaranteed even if the plaintiff prevails: at trial, the defendant can argue that the contract damage amount is too high and the plaintiff can argue that the amount is too low. The utility of contract damages is that when a plaintiff seeks pre-judgment attachment of assets China’s courts will almost always allow attachment in an amount equal to contract damages if such damage amount is specified in the contract. In contrast, if the contract provides for injunctive relief and monetary damages in an amount to be determined at trial, it is virtually impossible to obtain a writ of attachment. To repeat: Chinese companies do not like putting their assets at risk of being seized and so having a contract damages provision is a great deterrent.

Note also that an arbitration body cannot issue an enforceable assets seizure order and it is also virtually impossible to obtain such a writ from a court outside the district where the assets are located. That is why we normally want to sue in the “home town” of the defendant, even though that sounds counter-intuitive to a most U.S. and European lawyers, who have been taught to avoid getting “home-towned.” The Chinese understand the “home town” issue, which is why there is an automatic right of appeal to a higher court in a different town, and also why such appeals are de novo. Home town favoritism is often reversed at the higher court level.

5. Do not rely on the default provisions of Chinese intellectual property law to protect you against your licensee. Chinese IP law and your IP registrations protect against random third-party infringement. If you want protection against your licensee stealing your IP, put it into the contract. Your contract with your licensee is your best chance to control your Chinese counter-party and to protect yourself. Take advantage of it by using a contract that actually achieves those things.

6. The license term should be relatively long; say, five years. If the term is too short, then the penalty for early termination becomes irrelevant.

If your Chinese counter-party refuses to sign a contract that addresses the above, you know what they have in mind and you should reconsider whether to do the deal.

And so ends our story….

Categories: Chinese IP

Is China Innovative? The Latest Big Study Says Yes, Sort Of

China Law Blog - Sat, 09/10/2016 - 08:23

The Economist Magazine (some of the absolute best writing on China, BTW) just came out with an article, entitled, The Innovation Game. It is on the recently issued Global Innovation Index, published by Cornell University, INSEAD, a business school, and the World Intellectual Property Organisation. The index ranks 140 countries and, “not surprising: Switzerland, Britain, Sweden, the Netherlands and America lead the pack.”

What I (and the Economist) found most intersting about this work, was some of the breakout analysis looking at how countries do relative to their wealth. As the Economist noted from the below graph, “many countries in Africa punch above their weight.” What is also apparent from the below graph is that Arab countries — with Qatar the worst of the worst — fare quite poorly. China does very well on this innovation to wealth measure, as does Vietnam.

The Economist also graphed out some of the countries based on the quality of their innovation and their wealth and in this China soundly ranked at the top of the list of “middle-income countries,” as can be seen from the below:

So is China innovative? Based on this report, I think the answer has to be yes, at least relative to its wealth. Your thoughts?

For more on China innovation, check out Can China Innovate? and Does China lack “A reliable way to protect valuable inventions”? Hold on there . . .

Categories: Chinese IP

China Business Licenses and Why We Love Them

China Law Blog - Sat, 09/10/2016 - 07:58

China lawyers love China business licenses. They are frequently used to make sure that the signing party to any China contract actually exists and is an officially registered entity.

A China business licence can be a treasure trove of easily accessible information. Reviewing a China business license is usually the first thing we do by way of due diligence in any M&A deal, and in most other deals as well. The below is an email from one of my firm’s China attorneys to a client, explaining what we were able to garner from the China business license of a Chinese WFOE our client was interested in purchasing.

  1. Company name: _____________.

No English language equivalent is given in the documents (which is unusual), but this translates as _____________(Beijing) International Trading Company Limited.

  1. Company address: Beijing City, Dongcheng District, ________Number ____, Unit ____.

This is a prestigious location in the center of the high‐end retail/office district.

  1. Registered Capital: $600,000 US.

The amount is relatively high because high registered capital is typically 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).

  1. 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.

  1. Formation date: __/__/2011. Inspected and approved: __/__/2012.

It is good that the company has been formally inspected. It means someone is trying to follow proper procedure.

  1. 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 you 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 place the advertising. Only an advertising agency can do that.

  1. 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 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 in China.

Categories: Chinese IP

Quick Question Friday, China Law Answers, Part XXVIII

China Law Blog - Fri, 09/09/2016 - 09:02

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.

One of the more common emails we get are similar to the following one I received just this morning:

I have an associate who has a family-run ______ business in Sierra Leone. They have drummed up interest in China and want to move forward. Before they do, I have recommended they are 100% clear on the customs side for importing 1) ________ and 2)________ into China.

My question is can you advise on where to find additional information on such customs claims?

My answer was as follows:

I don’t understand your question or your associate’s situation. You make it seem like they are considering importing ______ and _________ stones into China, but yet you want information regarding a customs claim. Has the Chinese government already made a customs claim and, if so, what sort of claim?

Generally, for customs matters and pretty much all legal matters in China we start by determining the relevant Chinese laws and then reading them. We typically then read relevant Chinese cases and regulations that relate to or interpret those laws. Depending on the legal subject matter, we sometimes seek out the local regulations as well, and then we speak with the relevant government authorities to determine whether our views on the laws and regulations correspond with their views on the laws and regulations. Most importantly, we want to get their views on how the laws and regulations apply to our client’s specific situation. The Chinese government can be very helpful with these things and since it is their interpretations that matter in the end, this last step is oftentimes the most important of all. This tends to be especially true with customs where much is based on customs (pun intended) as opposed to the written law.



Categories: Chinese IP

A China IP Reality Check, Part 2

China Law Blog - Thu, 09/08/2016 - 05:58

Previously on China Law Blog…

In Part 1 of this three-part series, we discussed the background of the Talpa-Canxing dispute over The Voice of China. Now we’ll see what happened after Canxing broke Talpa’s heart.

Undeterred by Talpa finding a new licensee, Canxing announced that it would keep producing a singing show. The format would be different, Canxing claimed, but the name would be virtually the same: The Voice of China 2016 and 2016中国好声音. Because – surprise! – Canxing’s distribution partner Zhejiang Television was the registered owner of the 中国好声音 trademark.

Talpa sought a preliminary arbitral award in Hong Kong against STAR Group Limited, Canxing’s Hong Kong affiliate. But the Hong Kong International Arbitration Centre (HKIAC) denied Talpa’s request (at least insofar as it pertained to the Chinese name) because Talpa had no rights to the Chinese name. Did we mention that Talpa should have registered the Chinese-language trademark?

More or less at the same time, Tangde filed suit in a Beijing IP court against Canxing, claiming trademark infringement and unfair competition, and seeking a preliminary injunction. To the surprise of some, on June 20, 2016 the Beijing court ruled in Tangde’s favor insofar as the name of the program, holding that Canxing could not call its program either The Voice of China or 中国好声音. Canxing appealed the ruling, but changed the English name to “Sing! China.” On appeal, Canxing lost again, and complied with the ruling by changing the Chinese name of the show to中国新歌声, which roughly translates as China’s New Singing Voice.

Around June 13, 2016, while all of these legal proceedings were ongoing, SAPPRFT issued a directive curtailing the airing of television programs based on foreign formats. The directive clarified that programs produced in a foreign country (like The Big Bang Theory) and programs based on a foreign format (like The Voice of China) would both be considered foreign content, and that television channels (1) would have to secure prior government approval to air such programs, (2) could only show two foreign content programs during prime time each year, and (3) could only show one new foreign content program each year, and not during prime time in the first year.

On July 15, 2016, the first season of 中国新歌声 began on Zhejiang Television. It had the same judges as last year’s season of中国好声音 and an almost indistinguishable format. As of this writing, the season is about half over, and the main difference appears to be that during the blind audition phase, instead of swiveling 180 degrees, the judges’ chairs slide down a long ramp. Everyone I know who watches the show (including my entire family) agrees it is virtually the same show. And it seems to be as popular as ever, both with the viewing audience and with the sponsors.

The coverage to date has focused on this story as a contract, copyright, and trademark dispute. That’s true enough, and as far as that goes it’s not a particularly noteworthy dispute by Hollywood standards. Indeed, the fact that this dispute is the subject of multiple legal proceedings could even be seen as a sign of China’s maturity as a media market. Twenty years ago, if a Chinese production company copied an American or European television program, no one in the West would have cared (much), because (1) the rights owner would not have had a plausible remedy in China, (2) the Chinese company never would have paid for the rights, and (3) even if it had paid, the amount paid would have been a pittance.

But there’s another story here. By making a few superficial changes to the show and changing the name, Canxing and Zhejiang Television are trying to skirt the restrictions on foreign content. According to them,中国新歌声 is a 100% Chinese content show. Canxing has also stated that it won’t purchase any more foreign formats in the future.

If Canxing and Zhejiang can get away with such brazen and blatant copyright infringement — and thus far they have – this becomes a cautionary tale for any foreign content owner licensing to China. Chinese companies may still see value in licensing foreign formats, because just copying a show isn’t as easy it looks. Indeed, that’s why Canxing and other Chinese production companies have been paying serious money for the most popular formats. But once they have received the production bible and produced a season or two, what incentive do they have to keep paying a license fee, if they can make a couple changes and call the show 100% Chinese?

It will be interesting to see how (or if) Canxing and Zhejiang Television are held accountable for 中国新歌声. Even if they are found liable for copyright infringement, I doubt the damages will satisfy Talpa or Zhangde. Licensors of content have to look at this case and think seriously about frontloading any payments. They might not get a second bite.

Stay tuned for the thrilling conclusion, where I’ll discuss how content owners can better protect themselves when licensing to China to avoid the sort of trainwreck that Talpa appears headed for.

Categories: Chinese IP

Negotiating With Chinese Companies: Takeaways From President Obama’s G20 Stairgate Incident

China Law Blog - Wed, 09/07/2016 - 05:58

Just read a great post over at Andrew Hupert’s ChinaSolved Blog, entitled, Lessons from the G20 for “Regular” Negotiators. Hupert, who I count among the foremost experts at negotiating with Chinese companies, uses China’s recent dissing of President Obama as the springboard for explaining how foreign companies should negotiate with Chinese companies.

Hupert starts out his post by saying that no matter how seriously you view China’s treatment of the American entourage, it was “real” and mitigating or glossing over a conflict as “unimportant” is counter-productive and dangerous. “This was a significant event, and if you are negotiating with a Chinese counter-party then you need a plan for dealing with similar encounters.”

I completely agree with Hupert’s point and I have to say that our China lawyers too often encounter minimizing or tortured explanations of Chinese behavior from our clients. Chinese company didn’t pay on time? Must be because it didn’t understand the contract? Chinese company said it would do X and then did the exact opposite? Must be because of Chinese cultural differences. We hear these sorts of explanations all the time and our response to them is always something along the following lines: these are smart people who know exactly what they are doing. They are testing you and if you let them get away with it this time, you will be opening up the door to future incidents.

Or as Hupert so aptly puts it:

Ignoring them or pretending that they are immaterial to your business is a major blunder. Your negotiating counter-party is a serious person with experience, values, and attitudes that are very different from yours. Culture gaps are real, and they are not going away. If you are going to work with counter-party, then these differences will be part of your business — and part of your life.

Say “thank you”. The Chinese side is supplying your with free information. They are illustrating who they are, what they care about, and how they react to situations. Accidental honesty is the most significant kind. Behaviors are deeply rooted and consistent. Ignore them at your own risk.

Hupert then counsels you to take the free lesson and use it to analyze your Chinese counter-party: “It is your job to understand his attitudes, his values, and his culture.” And then you need to make any necessary adjustments in your own behavior, your deal structure and your business plan to reflect what you just learned.

Doing the right thing in these conflict-ridden situations is a tough thing because “it is human nature to do just the reverse – analyze us and attempt to adjust our counter-parties, but this only leads to conflict, failed deals, and value destruction.” Hupert concludes by calling on “breaking the cycle” by building “a negotiating plan that acknowledges (and even leverages) cultural differences.”

Great advice. Do you agree?

For more on what it takes for successfully negotiating with Chinese companies, check out the following:

Categories: Chinese IP

A China IP Reality Check

China Law Blog - Tue, 09/06/2016 - 05:58

A strange and fascinating story is unfolding right now in the world of Chinese reality television programming. One of the most popular shows in China, The Voice of China, is embroiled in legal controversy, and the outcome could affect every single content license in China. Okay, that might be a bit of hyperbole, but still, this is one episode you won’t want to miss.

The story begins back in 2012, when Shanghai Canxing Culture & Broadcast Co. (上海灿星文化传播有限公司) licensed the format for The Voice from Dutch media entity Talpa. Talpa had originated the format back in 2010 with The Voice of Holland and has since licensed the hugely popular singing competition to more than 60 countries, including the U.S. where it is simply known as The Voice.

The Voice of China began airing in July 2012 on Zhejiang Television, and quickly became one of the most popular television shows in China. Though the English name followed the usual naming convention, the Chinese name of the show was 中国好声音, which translates, more or less, as “China’s Best Voice.”

Guess who didn’t register the Chinese name? That would be Talpa. It’s depressing how often we have to repeat this: please, please, please register both your English-language trademark AND the Chinese version. By now, any company that gets caught flat-footed on this issue only has themselves (or their IP counsel) to blame.

Meanwhile, starting in 2012, the Chinese government agency overseeing media and censorship (currently known as SAPPRFT, for State Administration of Press, Publication, Radio, Film and Television), which had always restricted foreign content in China, began to announce even more directives regulating foreign film and television content, including specific limitations on when and how often foreign and foreign-format shows could air on television and on streaming sites, and even specific limitations on singing competition programs. News stories and commentary about these directives often singled out The Voice as a possible target, as it was both popular and a foreign format show. But Zhejiang vowed that the show would remain on the air, and so it did — and continued to be a ratings powerhouse.

In early 2016, license renewal talks broke down between Canxing and Talpa. According to Canxing, Talpa asked for an exorbitant royalty percentage and also tried to get Canxing to take a package of shows when all Canxing really wanted was The Voice. This latter negotiating ploy, if true, is hardly unique to this situation; the dismal choice faced by Canxing is familiar to anyone who’s been a cable subscriber.

After Canxing ended the talks unilaterally, Talpa quickly licensed the format to another Zhejiang-based Chinese production company, Zhejiang Tangde Film & TV Co., Ltd. (浙江唐德影视股份有限公司), and Talpa and Tangde announced plans to produce seasons 5-8 of The Voice of China.

You think this story’s over but it’s ready to begin. Tune in tomorrow for the thrilling conclusion.

Categories: Chinese IP