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China Defamation Law – Based on a (Mostly) True Story

China Law Blog - 4 hours 8 min ago

Making a biopic – a biographical movie about real people– is complicated. And one of the biggest concerns is liability for defamation. In an ideal world, filmmakers would get everyone depicted in the movie to sign a release. But that’s often impractical: people want too much money, too much control over how they are depicted, or both. And that assumes filmmakers can even find the people in question. It’s understandable; nobody wants to see the embarrassing things they’ve done memorialized onscreen. But a movie without conflict isn’t much of a movie.

In the United States, filmmakers have two main legal tools at their disposal when countering allegations of defamation. First, the truth is a defense to defamation. Even if Ike Turner didn’t like how he was depicted in What’s Love Got To Do With It, that he did in fact beat his wife insulated the filmmakers from liability. Second, you can’t defame someone who is dead. Which (in part) explains The Brittany Murphy Story and many of the other biopics on Lifetime.

But in China, the law on defamation is markedly different. Truth is not a defense, and you can defame someone even if they’re dead. That can (and does) have a chilling effect on biopics in China.

Chinese defamation law is not specifically spelled out as such, but has been developed from Articles 101 and 102 of the General Principles of the Civil Law (enacted in 1987), and several subsequent supporting documents: the Supreme People’s Court’s Answers to Certain Issues Concerning Trials of Cases Involving the Right to Reputation (released in 1993), Understanding and Application of the 1993 AnswersInterpretation of Certain Issues Concerning Trials of Cases Involving the Right to Reputation (released in 1998), and Understanding and Application of the 1998 Interpretation.

As explained in the 1993 Answers, defamation exists if (i) the defendant has committed an illegal act, (ii) the plaintiff’s reputation has been damaged, and (iii) the illegal act caused the damage. Such defamation exists in three circumstances:

  1. Written or oral insults or libel that damage a person’s reputation;
  2. Unauthorized disclosure of personal information that damages a person’s reputation; or
  3. A news report containing “gross error” that damages a person’s reputation.

In Understanding and Application of the 1993 Answers, the SPC clarified that truth was NOT a defense to defamation. If a work insults and damages a person’s reputation, it is defamatory regardless of whether it is true.

The 1993 Answers state that either the allegedly defamed person or their close relatives (defined as spouses, parents, children, siblings, grandparents, and grandchildren) have standing to sue. That rules out almost anyone alive from 1950 onward as a character that can be included without fear of liability.

To be sure, the difficulty in securing effective injunctive relief in China does not create the same sense of urgency to get releases as in the United States. But the existence of the defamation laws, along with the often heavy hand of the Chinese government overseeing content, no doubt explains why so many biopics in China are either hagiographies or set in ancient times. Why take the risk of depicting real people unless the Chinese government has specifically asked you to do so?

Perhaps emboldened by the not particularly artist-friendly laws, a recent lawsuit attempted to extend the protection against defamation to an absurd conclusion. A woman with the same name as a character referenced in Feng Xiaogang’s 2016 movie I Am Not Madame Bovary sued the filmmakers for defamation, alleging that her reputation and health had suffered because a character with her name was described as a slatternly woman of low morals. The character in question, Pan Jinlian, isn’t even in the movie per se – she’s a femme fatale from the classic Chinese novel, Water Margin, who is merely mentioned as a counterpoint to the film’s lead character. This would be like someone named Mata Hari suing a film that mentioned the World War I temptress/spy. If Ms. Pan has a complaint against anyone, it’s her parents for naming her after the character in the novel.

It’s one of the more ridiculous arguments I’ve heard, but at the same time it’s oddly encouraging for two reasons. First, it’s encouraging because the case was dismissed quickly; the judge noted that the character in the movie refers to the character in the book, not to anyone in China that happens to have the same name. Second, it’s encouraging to see that people in China feel confident enough in their legal system to bring a lawsuit when they have been aggrieved, even for something as nonsensical as this.

But if the characterization had been a little closer to the truth, the outcome might have been different.

Another recent Chinese movie, Dearest, was based on a true story about a couple whose child was kidnapped. The woman who was the basis for the lead character alleged the movie made things up about her life and suggested she was unchaste. She threatened to sue for defamation, but the director managed to resolve the dispute with a personal apology. It’s not always going to be that simple.

Even if a movie is not considered defamatory in the United States, it still might be considered defamatory in China. And the Chinese distributor/exhibitor would be held liable. As the Chinese media market continues to grow, and as the Chinese court system continues to gain strength and credibility, I wouldn’t be surprised to see many more defamation lawsuits in China, especially as US studios launch more partnerships with Chinese film companies to create Chinese-language content for the local market.

The bottom line for filmmakers is that getting releases has become all but mandatory. Especially for movies likely to be shown in China.

Categories: Chinese IP

China Employment Law: Eight Tips for Achieving Bliss

China Law Blog - Sun, 05/28/2017 - 05:58
China employment law tips

If you take the time to understand and act according to China’s key employment laws, you can prevent many of the problems foreign employers typically face in China. Investing the time and money up-front is much less expensive than the alternative. These eight tips will help you stay on the right track.

1. Write employment contracts that spell out every aspect of your employer-employee relationship. Written employment contracts are the heart of China’s employment system. In the United States, employers can terminate employees at virtually any time and for virtually any reason. This is known as employment at will. The very concept of at-will employment is foreign to the Chinese and American companies often get themselves into legal trouble when they fail to adequately understand this significant difference between the two countries. As an employer in China, you must have written employment contracts with all full-time employees.

Employers that don’t implement written employment contracts are subject to penalties and administrative fines. More importantly, in the absence of a written agreement with your China employees, Chinese government officials may come to the conclusion that your employees have open-term employment agreements, which essentially means that the labor relationship has no definitive end date.

If an employer allows more than a month to pass (note that this period is shorter in some cities) without a written employment contract, the employer will be required to pay double the employee’s monthly wage.

If an employer lets more than a year go by without implementing a written employment contract, the employee will be considered to have entered into an open-term employment contract with the employer. Such a contract usually means the employer must retain the employee until his or her retirement age. After an employee has completed his or her probation period, it is very difficult to terminate the employee during the employment contract term. It is even more difficult to terminate an employee who is operating under an open-term contract.

2. Make sure all mandatory provisions are included in your employment contracts. China’s Labor Contract Law requires employment contracts to 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 specific term/duration of the employment contract (and any probation period)
  • Salary
  • A description of the work to be done by the employee
  • Location of the workplace
  • Working hours
  • Rest and leave time
  • Social insurance
  • Applicable labor protections, labor conditions and protection against occupational hazards
  • Other terms required by relevant laws and regulations

In addition to the required items, employers should include provisions describing any additional benefits they will provide to particular employees.

3. Clearly spell out the term of the employment contract and probation period. A probation period gives the employer and the new employee time to test each other out. Generally speaking, the longer the initial employment term, the longer the probation period may be. Typically, for employment terms of more than three months but less than one year, you may establish 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 plan, the probation period cannot be longer than six months. Each employee can have only one probation period.

Since it is difficult to terminate an employee after the probation period, we usually recommend an initial term of three years. That allows you to provide a six-month probation period (the longest permitted under Chinese law). Though it is fairly easy to terminate an employee during this probation period, it not as easy as widely believed. See China Employee Probation: All is NOT What it Seems.

Keep in mind that, in most cities in China, the employee will automatically be converted into an open-term contract employee when you rehire the person pursuant to a second fixed-term contract. Terminating an employee on an open-term contract is much more problematic than terminating one on a fixed term. By establishing a long probation period, you can delay the onset of the open-term period, so you can use this time to determine whether you should convert the employee to a lifetime employee.

As with most aspects of employment law in China, the general rule is just that; it is not the right option for everyone 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. Most municipalities enforce an eight-hour workday and 40-hour workweek, 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 somewhat similar to the salaried employee system in the United States It applies to certain categories of employees such as senior management and sales personnel. The specific categories of eligible employees are defined by local rules. The flexible working hours system can benefit employers who need greater flexibility and want to avoid paying overtime whenever an employee works outside the standard hours. Under the comprehensive working hours system, employers may have their employees work more than 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.

For the most part, before implementing either a flexible working hours system or a comprehensive working hours system, an employer must secure prior approval from the local labor bureau and the approval is valid for only a limited time. You must submit a renewal application before the expiration of the term specified in the government’s approval letter.

Regardless of which working hours system you implement, it’s generally a good idea (to avoid paying overtime) to give employees the day off on Chinese national holidays, if at all possible.

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

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

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

Employers are required to make arrangements for employees to use their 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 does not allow an employee to take annual leave may be forced to pay that employee 300% of his or her daily wages for each unused vacation day. Chinese employees are very familiar with this law and they virtually always pursue the 300% owed to them (and more) when they leave a job.

6. Understand what you’re getting into before paying for a 13th month. Paying a 13th month of salary is customary in many parts of China, and it is typically paid out before the Chinese New Year. This is not required, but if you decide to do it, you will want to specify clearly and in writing the conditions for earning this bonus month of salary. If you’re not careful, you may end up having to pay this amount indefinitely.

Many foreign companies doing business in China have generously added this 13th month only after calculating their expenditures based on a 12-month system. If you are going to implement a bonus system for employees, you should clearly define its parameters in your employment contracts. For example, instead of paying a higher salary but no annual bonus, you may opt for a lower salary with an annual bonus, which is usually paid early in the following year. This will add no cost to you, but your employee can benefit from a lower individual income tax burden.

7. Factor in social insurance and housing fund payments. As an employer in China, 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 employees. The exact type of required social insurance is determined by local rules. Whether this contribution must be made for your expat employees will depend on the local requirements at your (the employer’s) location. Some employers mistakenly pay for expat employees’ social insurance when they don’t have to, and others neglect to pay for their expat employees’ social insurance when they are required to do so. Both errors can be very costly.

8. Make Chinese your employment contract’s governing language. We recommend specifying in your employment contracts that Chinese is the governing language, rather than using a dual-language contract. Single-language contracts can help eliminate costly disputes related to differences in the two “official” languages. Such disagreements are practically inevitable with dual-language contracts. It also makes the terms of the contract clearer for both you and your employees. For the benefit of our clients who cannot read Chinese, our China employment lawyers virtually also create an unofficial English-language version as well.

Categories: Chinese IP

China Product Outsourcing: Be Like Anker

China Law Blog - Sat, 05/27/2017 - 10:29

Anker is not a client of our law firm, so my gushing is not any sort of payback. But here goes.

I am a huge fan of Anker. Whenever I would talk about how I was not aware of any Chinese consumer goods company with a super high end stellar reputation in the United States, I would always qualify it by saying, except Anker. I would then usually say, “and that is who other Chinese consumer goods companies need to follow.” Then I learned that Anker is not really a Chinese company. Oh well.

But Anker still very much deserves to be followed (read “follow” and “followed” as a euphemism for “copy” and “copied”). So how convenient that Nick Statt just came out with an article for the Verge setting out the roadmap for doing exactly that, with How Anker is Beating Apple and Samsung at Their Own Accessory Game.

But first, please allow me to gush a bit about Anker. I’m not sure for how long I’ve been buying Anker products, but I know my first buy was many years ago and I know the first product was a predecessor to the PowerCore Mini, a phone charger. I remember how my research revealed that product to be the best product like it on the market and one of the cheapest. It came, I loved it, and within weeks I had bought the same thing for everyone else in my family. In my house (or in my eldest daughter’s apartment or my youngest daughter’s dorm room) we now own and love the following Anker products:

  • Pretty much every PowerCore size and shape possible. The Anker PowerCore 20100 sits on our treadmill so we can charge our iPhones and iPad for weeks without having to recharge–it’s in the middle of the room, far from an outlet.
  • I never leave town without my trusty PowerCore Fusion 5000 2-in-1 Portable Charger and Wall Charger, which cuts down on the number of moving parts I need to bring.
  • A ton of Anker car chargers and cables.
  • And when Anker expanded into home products with its Eufy line, we snared a vacuum, a scale and night lights at great prices, and — no surprise — all work exactly as advertised.

I buy Anker/Eufy products because they work well and forever, look good, and because they virtually always cost less than anything comparable. There are few brands that combine all this and those that do win my admiration.

But of more relevance (probably) to most of our readers is how Anker managed to pull all of this off, which is where the Verge article comes in. Two things struck me from the Verge article. One is how Anker has set up shop in Shenzhen. The interview with Anker’s founder, Steven Yang, took place with Yang “from his office in Shenzhen.” The article explains how Yang and “his core team” set up shop in Shenzhen to find its manufacturers:

It was a long and painful process. After he quit his job at Google in July 2011, Anker took 12 months just to prototype its first laptop battery. That was even after Yang and the core team moved to Shenzhen to find reliable manufacturing partners. “I knew that if I stayed in California and had people FedEx me prototypes in a week, it was just not going to work,” he says.

Many hardware companies, especially crowdfunded ones in the US, learn that lesson the hard way, missing deadlines and hitting snags that lead to months-long delays. A solid supply chain is so crucial to a hardware company’s survival that there’s an entire consulting industry around helping startups find suppliers and set expectations.

Amen. If you want to get connected with the best Chinese manufacturers and you want those manufacturers to do their best work for you, the fastest and best way to accomplish this is to get on an airplane yourself and spend massive time meeting in person (multiple times) with a ton of Chinese manufacturers and then meet even more times in person with those you like the best. There is no substitute for you or someone important from your company having these in person meetings in China. And this is true pretty much no matter what you are looking to have made in China.

I am always saying the following to clients, potential clients, and even start-up companies that ask me for quick advice via email:

  • “A day on the ground in China is worth a month in your office in ____________, USA/Canada/Latin America/Europe/Australia.”
  • “Just going and meeting with potential factories or with your existing factory will do wonders in terms of product quality and timeliness.” I cannot back this up with hard facts, but I truly believe that those companies that meet with their Chinese suppliers in person in China at least once have 80 percent fewer problems than those who never do, and those who meet regularly with their Chinese suppliers have 95 percent fewer problems. Going to China for live meetings humanizes you, says that you care, and that you will be watching what the Chinese factory does and holding them accountable. This is hugely powerful.

And number two, be relentless yet patient with product quality:

“The challenge wasn’t selling products,” Yang says. “It was making products and making sure they were high-quality as well. That’s why we spent a majority of our effort on R&D and product development.” The company does a majority of its sales directly to consumers over Amazon Marketplace, where a combination of strong reviews, low prices, and prominent placement in search rankings can turn a single product into a lucrative line.

I cannot tell you how many companies my firm has represented that never recovered from having rushed their first product to market (oftentimes to meet or even come close to meeting shipping dates they had promised on Kickstarter). These companies shipped a defective product and then could never recover from the expenses they had to incur in fixing or replacing or providing refunds for their one bad product. Not to mention the damage they suffered to their new brand.

Follow Anker. For further ensuring your China product success and for ensuring that once you get it, it will not be seized from you, be sure to check out Having Your Product Made In China: The Basics on Protecting It and You.

Oh, and one more plug/gush. If you are working on developing a hardware product you should be aware of a hardware accelerator in Shenzhen called HAX. Our China lawyers speak frequently there and our law firm has represented a good number of its participants. Its slogan is “When building hardware all roads lead to Shenzhen” and its pitch is “Come and plug yourself up to our ecosystem, leverage our curriculum and build meaningful products.” Very briefly, if you are working on a great product, HAX will help fund you and plug you into their ecosystem and by doing so, give you a chance to spend three months with them in Shenzhen and better learn the lay of that land. It is worthwhile. HAX cannot make your company into the next Anker, but it certainly can help.

Categories: Chinese IP

China NNN Agreements: What to do When Negotiations Bog Down

China Law Blog - Fri, 05/26/2017 - 08:48

The below is an email from one of our China lawyers to a client explaining why our client needs to stay firm in its position regarding its proposed NNN Agreement. This email involves an initial NNN regarding a product the Chinese company wanted to review to help it determine whether it wanted to buy stock from our client to make a large stake investment in our client. This email is from quite some time ago on a deal that has already concluded. It has been modified slightly so as to camouflage any possible identifiers.

I reviewed the NNN agreement we provided you and I reiterate that there is no basis to make changes to what we drafted for this deal.

There are three provisions of the NNN Agreement that restrict the Chinese company’s right to make your product for themselves or for other entities.These provisions provide that the recipient (Chinese Company) shall not:

— Make any commercial use of Confidential Information in competition with you.

— Sell any Product or goods similar to the Product which make use of your Confidential Information to anyone other than you.

— Use any Confidential Information provided by you in any manner to create any goods for any entity other than for you.

These provisions only apply to the improper use of your confidential information and there is no way any party acting in good faith could interpret these provisions to provide for any restriction on their right to manufacture and sell their own products or to manufacture and sell products designed by some other entity. Since the Chinese manufacturer’s concern is without basis and makes no logical or legal sense, there is no revision that should be made.

Note also that we have used these “offending provisions” hundreds of times in China (and their predecessor provisions hundreds of times as well). In the early days, some Chinese factories expressed concerns with these provisions and so we carefully revised them to deal with those concerns.

If ___________ [China manufacturer] continues objecting to this clear and restricted language you should assume you have a problem. The only way ____________ [China manufacturer] could have a problem with this language is if it believes the Confidential Information is not unique and has already been provided to them by one of your competitors and is not owned by you. This is one reason Chinese entities object to an NNN agreement: they do not believe what you will provide them is unique or owned by your company.

When this specific objection is raised and we think the objection has merit, we add a provision stating that if the Receiving Party proves the Confidential Information was previously disclosed to them by a third party and if the Receiving Party proves it is currently making use of the Confidential Information in current production for itself or for a third party, the provisions of the NNN will not apply. However, it would be a mistake to add this language to the current NNN agreement because this type of objection is never made regarding companies in your situation and because __________ [China manufacturer] is not making this specific objection and there is no reason to suggest such an objection is conceivable with respect to your Confidential Information. This kind of “you don’t really own the information” objection is raised only in the case of new designs from bare startups where the design is not patented or trademarked and where the product has no history of having been manufactured or sold. No one would consider raising this objection to mature products from a mature company such as yours. But that is not what _____________ [China manufacturer] indicates as their current concern. They say their concern is that the quoted language will prevent them from manufacturing and selling to __________ [a competitor]. The simple answer is that this language does not mean that and no one reading the actual written terms in good faith would read them that way, and prior to this, nobody ever has.

As we have discussed, given that you are dealing here with a direct competitor, you do not want to allow for any ambiguity at all. You have a 100% right in all Confidential Information and _____________ [China manufacturer] is not permitted to make any use of the Confidential Information in any way that competes with you. It’s pretty simple. They either agree or they don’t. When a Chinese company raises these kinds of meritless objections, all you should say is: “Sign it or we will not go any further with our discussions.” And that is exactly what you should  do here. Any company raises this kind of objection regarding clear and unambiguous language will be hard to deal with in working on a full scale sale stock agreement.

Note that when we draft a final Stock Sale Agreement, we will include transaction specific confidentiality provisions that will involve additional customized language not included in the current NNN. For now, however, the most important issue is to test out ______ [China manufacturer]. Will it act reasonably or will it continue to make arguments that make no legal or business sense? It will be good for you to know this right away.

As always, please feel free to contact me if you have any additional questions.

Categories: Chinese IP

China Employee Vacation Days: China Employment Law Writ Small

China Law Blog - Thu, 05/25/2017 - 07:56

When it comes to your China employment law matter, you should keep the following three important precepts always in mind:

  1. China’s employment laws and its legal system favor employees over employers. As in most countries, the employer is presumed to be the more powerful party, so the law provides the employee with many protections. Among other things, this means that in most employer-employee disputes, the employer (not the employee) will bear the burden of proving what actually happened, and if the employer cannot prove it (usually with written documentation in Chinese) the employee will prevail.
  2. China’s employment laws cannot usually be modified by contract.
  3. China employment law is very local. What you can or cannot do in Shenzhen could be different from what you can or cannot do in Beijing. Before making any important employment move, you should check the rules for China, the rules for your province, the rules for your city and, in most cases, you should discuss with your local labor and employment authorities as well. Failing to do this is what causes foreign employers problems. See also China Employment Law: Simple Questions and Complex Answers.

This post is about how the second rule impacts China employee vacation days — an often-litigated employment law issue in China.

Let’s consider a hypothetical based on a question our China employment lawyers are often asked. A China employer’s Rules and Regulations provide that its employees are entitled to the statutory minimum number of vacation days and no carry-over of vacation time is allowed. Let’s further assume that the Rules and Regulations state that the employees have the responsibility to make sure they take all their vacation days within the relevant calendar year and they are expected to keep track of their vacation days. Lastly, the Rules and Regulations provide that if the employee fails to take all or part of his or her vacation time, the employee will be deemed to have given up all unused vacation days and cannot claim any compensation for such days. A disgruntled employee then sues the employer for 300% pay for all of her unused vacation days. The employer’s response is to refer to its Rules and Regulations and the fact that this particular employee signed an acknowledgment of receipt form acknowledging receipt of these Rules and Regulations and refuses to pay the employee anything on the basis that she knowingly and voluntarily forfeited all her unused vacation days.

The employer then asks one of our China lawyers what it should do.

When I or another of our China lawyers gets this type of question, the first thing we do is gather up more facts. What city is it? What does the employment contract actually say? Is it in Chinese (which makes it a lot harder for the employee to deny knowing what he or she signed) and a lot easier for the court to know what it says. What do the Rules and Regulations actually say and is that in Chinese as well? Most importantly, what is actually going on with this employee and this employee’s anger with her employer and what actually happened regarding vacation time. Many times the best way to resolve a loaded employee-employer dispute like this is to get both parties to step away, calm down and compromise, realizing that full-on expensive litigation is not in anyone’s best interest.

For purposes of the discussion here, however, I am going to assume a number of things, like the following:

  • The employer Rules and Regulations were lawfully implemented. In other words, the employer followed all applicable national, state and local laws with respect to its implementation. This means it gave its employees prior notice of the Rules and Regulations and it gave them an opportunity to comment on them.
  • The employer never made any arrangements for the employee to take her vacation time or if it did, it does not have contemporaneous written proof of this;
  • The employer never obtained a written request from the employee expressly stating that she would not take those days for personal reasons (i.e., reasons not related to the employer).

Before I give my analysis, let me first give you our loyal readers a super quick review of the applicable China law on vacation time: All China employers are required to provide their employees with paid vacation days based on each employee’s total years of service. Employers are also legally obligated to ensure their employees take their vacation days and to the extent an employer fails to do so, it must pay the employee an additional 200% of her normal wages for each unused vacation day.

So, what has the employer in my hypothetical above done wrong? The below is an non-exhaustive list:

First, the employer’s vacation policy in its Rules and Regulations is probably illegal because it shifts the employer’s obligation to the employee. I say “probably” because the law on this, like so many other China employment laws is very localized. The law says the employer must ensure all employees take their legally entitled vacation time and if that is not possible, the employer must pay the employee in lieu of the vacation days. Many jurisdictions in China very strictly interpret this law. The Western mindset that if you don’t exercise your legal rights, you waive or lose them does not comport with the legal reality here. It does not matter that the employee signed off on the receipt of the employer’s Rules and Regulations. The employee did not waive her rights to vacation time.

Even if the employer’s policy on vacation time were legal (which is not going to be the case just about everywhere in China), the employer (not the employees) should be the who must stay on top of how employees are taking and tracking their vacation time. The employer’s failure to keep track of this particular employee’s vacation time, standing alone, would probably be enough for the employee to prevail in any litigated or arbitrated dispute. A laid-back management style does not work for China.

Second, the employer never obtained the employee’s written request expressly stating she would not take those vacation days for personal reasons. Of course, very few employees would go along with a voluntary forfeiture of their mandatory vacation days. If an employer is going to argue that one of its employees voluntarily relinquished her vacation days, the employer must be able to produce relevant evidence of this because the employer bears the burden of proving this. And without something in writing from the employee showing that she herself expressly requested that she be able to give up her vacation time, the employer is going to lose, and the employer’s Rules and Regulations and the employee’s signed acknowledgment of receipt form are not going to change this result.

Finally, suppose the employment relationship in the above hypothetical has been formally terminated and the employee has sued. The employer really should have dealt with this vacation issue before it got sued. China employees are getting increasingly serious about enforcing their legal rights under Chinese labor laws and this makes it essential that employers seek to resolve all outstanding issues between them and their employees before  termination. Otherwise, there is a good chance the employee will bring a claim for whatever issues are outstanding, including unused vacation time. A well-crafted termination/separation agreement will ensure that the employee will not and cannot come back seeking payment for unused vacation time (or whatever) and that if she does, the court will rule against the employee because the parties have a legally binding and enforceable agreement covering the issue.

Bottom line: Employers too often believe they have China-centric and legally binding Rules and Regulations when they don’t. They often also think they have great evidence against their employee(s) when they don’t. Employers often blame their employees for not doing everything the employers are supposed to do under China employment laws and this will mean the employer will almost certainly lose in any dispute regarding the contested issue. Still think you are in compliance with China’s employment laws? Maybe you should think again.

Categories: Chinese IP

China Joint Ventures: The 101

China Law Blog - Wed, 05/24/2017 - 05:58

Our own China lawyers have written countless articles on China joint ventures (for this blog, for AmCham, for the Wall Street Journal, for Above the Law,  and for many others), so it good when someone we know and respect says the same basic thing about them, which is that you should watch out.

The writer is my friend Randall Lewis, who has headed up Asia legal out of China for both Danone and ConAgra and who truly knows China. Last month Randall wrote about setting up joint ventures in emerging market countries. Randall stated that his article “is intended to be your general “watch-out” guide to avoid basic and simple joint venture mistakes.”

Randall begins his article by commenting on how people are wrong to believe that if they “set up a good platform for a business, agree on ownership percentages and the business plan/finances work. . . . the lawyers will work out the rest.” He then proceeds to list a ton of “common mistakes your commercial folks WILL make when taking your company into a foreign market. He makes clear that his list is “not hypothetical” as he has encountered every situation personally. Guess, what, our China lawyers have encountered every situation personally as well, and multiple times.

But without further ado, here are the more China-relevant mistakes Randall has seen and about which he wants to warn you, with my comments about China joint ventures in italics:

  • Commercial people frequently engage in detailed discussions with potential partners before discussing options, strategic structures and legal issues with their own legal counsel. This leads to promises being made and structures being agreed to that are completely against your own best interest and which benefit only your JV partner. Once these “agreements” have been made, it is difficult to change once you bring in legal counsel. In short, a wise approach is to consult legal counsel BEFORE you have discussions on structure, methods of investment, holding companies, corporate governance structures or just about anything outside of pure commercial matters and general alignment. Definitely true for China as well. 
  • Never take legal advice from your potential JV partner. This happens more often than you know. Your commercial people will start a discussion and the “local” will advise your team on what they can and can’t do in their country. This advice is more likely than not, 100% incorrect or misleading for a good reason; it is being given to take advantage of your company and to secure a structure not in your best interest. I wrote about this in China Joint Ventures, The Tide is Out: We have seen US companies that have put tens of millions of dollars into a Chinese joint venture, using no legal counsel at all, using the legal counsel of their joint venture partner, or using a local Chinese lawyer who has no experience with foreign joint ventures and no real incentive to protect the foreign company. 
  • If someone says; “we don’t need to involve the lawyers yet” or “we don’t need to have your legal counsel in the room for this discussion” or “we prefer to let the lawyers work out the contracts after we agree on XYZ,” stop immediately and ask yourself if that makes any sense.  Usually, excluding lawyers is not for cost savings or to do you a favor in terms of simplifying your discussions; it is, simply enough, to pull the wool over your eyes. True for China. 
  • If someone says “ we have someone that will act as our CEO/GM and CFO/finance people” be wary that you have enough control over key functions so that you don’t end up a financial investor in a JV vs a real partner. Keep in mind that if someone is appointed to an executive function by your partner, that person is more likely than not, viewing your partner as their “employer” vs the joint venture entity or your company. Their interest will be completely aligned with your partner and not to your company. 100% true for China as well. The key is control and one of the biggest mistakes we see is Western companies wrongly assuming that because they own 51% or more of the joint venture, they control it. See Avoiding Mistakes in China Joint Ventures.
  • When your partner says to you they will build your factory and secure all the licenses and permits for your new business, use caution! If you are in a JV and your partner is engaging in illegal behavior that violates the UK Bribery Act, FCPA or other local equivalent you may find yourself on the hook for all of your partner’s activities! In short, you need to be able to manage and control your partners activities beyond just signing a contract that obligates them to comply with your FCPA and UK Bribery Act obligations. Many times a JV partner will sign anything and proceed to do whatever they desire because they don’t understand the obligations, nor do they care or “that is not how they do things in their country”.  Way too many companies enter into contracts thinking they can trust their partner to follow the rules (hey, you have a contract) and then they get burned. This happens in China all the time.
  • Don’t be impressed by your partner’s government connections and think this is of great benefit to your new potential JV.  It is 99% possible, those connections will be used to benefit your partner in the future and to your detriment. I have seen more than my fair share of commercial people get overly excited about a “connected” potential partner only to find out a few years down the road that those connections are being used privately to do things and take actions the partner is not contractually or legally able to do. Definitely true of China.
  • Don’t be led to believe that if you have a controlling position at a Board level you are in control of your JV in many countries. For example, in China (and other locations), the right to control the Board does not give you effective control of the company. For actual control you need to control the appointment of the General Manager and ultimately the company “chop” or seal (which allows the possessor the power to make binding contracts on behalf of the joint venture company and to deal with the company’s banks and other key service providers).  In addition, your access to financial information and the ability to audit will not necessarily be assured unless you control the CFO position. Securing this finance position will also assure early warning of problems with the business and potential fraud. Agreed. See Avoiding Mistakes in China Joint Ventures.
  • Don’t let your partner convince your team that setting up a JV on a 50/50 basis with no mechanism to resolve a deadlock is a good idea.  I have seen more than my fair share of JVs that have 50/50 shareholding and no deadlock mechanism leading to a complete breakdown of the JV business.  This usually only benefits your local partner that had this as their goal from the beginning. Once the JV is successful (or they have what they need from the partnership) they manufacture a way to push you out so they either buy your interest (in a manner outlined by a local court) or exit to run a new business that looks identical to your own. We see one of these pretty much every year involving China joint ventures and they are never a good situation. 

Randall ends his article by calling for companies looking at doing a joint venture to “slow down, use caution, exercise common sense and surround yourself with advisors that challenge your assumptions and criticize your deal.” I can agree with that also.

Categories: Chinese IP

China Employee Probation: All is NOT What it Seems

China Law Blog - Tue, 05/23/2017 - 08:51
China employee probation: like a maze.

Employee probation periods has to be one of the most misunderstood issues in China employment law. Westerners just assume their probationary employees are at will employees who can be fired at any time, for good reason or for no reason at all. Wrong. The probation period is PART of the normal employment term and therefore pretty much all protections afforded to regular employees also apply to employees on probation as well. This period should really not even be called “probation” because it really isn’t. It was five and ten years ago, but no longer and your failure to realize this will be at your peril. Trust me.

Our China employment lawyers often are faced with situations like this: Employer hires an employee on January 1st with a two-month probation period. Employer then contacts us in late February to say it will be terminating the employee before the employee’s probation period runs out so it can avoid paying statutory severance. The employer’s reason for the termination is that the employee is “just not all that good” and they believe they “can do better” The employee neither failed to follow employer directions nor did he or she fail to possess the qualifications required for his or her position. In other words, the employer has NO legal basis for terminating the employee. So with the probation period now coming to an end, can the employer go ahead with its planned unilateral termination without having to pay severance? Probably not.

The employer is shocked when we tell them that if they go ahead with the unilateral termination, they will be at risk of being sued for an unlawful termination. China is not an employment-at-will jurisdiction and the probation period is not an exception to this general rule. An employee termination during the probation period requires a legally permissible ground and except for the limited number of grounds permitted under the law, an employee on probation cannot be unilaterally terminated. If this sound familiar, it should. Because if you replace the italicized parts with “during the employment term” you get the most fundamental rule of China’s employment law: a China employee cannot be unilaterally terminated without cause.

So under what grounds can an employer terminate an employee on probation?

Article 39 of the PRC Labor Contract Law provides that an employee on probation may be terminated with no severance for one of the following six reasons:

  1. The employee is proven to have failed to satisfy the conditions of employment during the probation period;
  2. The employee materially breaches labor disciplines or the employer’s rules and regulations;
  3. The employee commits a serious dereliction of duty or practices graft, causing substantial damage to the employer;
  4. The employee has established an employment relationship with another employer which materially affects the completion of her tasks with the employer, or she refuses to terminate such employment relationship with the other employer, after she is required to do so by the employer;
  5. The employee uses deception or coercion, or takes advantage of the employer’s difficulties to cause the employer to conclude the contract, or to make an amendment thereto, that is contrary to that party’s true intent;
  6. The employee has criminal liability imposed in accordance with the law.

Under Articles 40(1) and 40(2) of the Labor Contract Law, an employee on probation may also be terminated if:

  1. He or she has fallen ill or sustained a non-work related injury and, at the end of the medical treatment period, can neither engage in the original work nor in other work arranged by the employer;
  2. He or she is incompetent and remains incompetent after training or assignment to another post.

That’s IT. No law allows an employer to terminate an employee on probation for whatever reason the employer wishes (or for no reason at all) simply because the employee is on probation.

In addition, Article 21 of China’s Labor Contract Law clearly states that when an employer terminates an employee during the probation period, the employer must provide the employee with reason(s) for such termination. It is critical that the employer convincingly document its terminations in writing — in Chinese. If the documentation setting forth the grounds for termination is not convincing, you will be giving your terminated employee incentive to challenge the termination and a good chance of prevailing against you in a labor arbitration proceeding. This is especially true when the employer is a WFOE because let’s face it, China is always going to favor a Chinese employee over a foreign-owned entity.

The most common ground for terminating an employee on probation is the first ground under Article 39; the employer can prove the employee on probation does not satisfy the conditions of employment. Note the wording though in Article 39. The employer must be able to prove that its employee failed to satisfy the employer’s conditions of employment. For the employer to be able to prove this, it must have specified such conditions/requirements in a writing and it must communicated those conditions to the employee beforehand. Though some courts will consider the general requirements in an employee’s specific industry as conditions of employment, most courts will not. What this means is that the smart employer has a clear writing setting out its probationary employee’s conditions of employment and if a termination becomes necessary, another clear writing documenting exactly how the employee failed to meet those conditions.

What then is the difference between a probation period and a normal employment term? Not much, actually. If an employer can prove any of the above grounds for termination exits, it can terminate the employee during the probation period without having to pay severance. Or the employer can wait until the end of its initial fixed term and not renew the contract but pay severance to the employee.

What then should you as an employer in China do? The best way to proceed is usually to specify the employment requirements in your employment contracts or in a separate agreement/document (in Chinese!) and preserve good evidence of how your employee fails to meet those requirements. If you as an employer want to be able to full take advantage of the probation period, you should set out the conditions of employment in writing and provide those to the employee for review and sign off before the employment relationship commences. And then, as discussed above, if you find yourself wanting to terminate that probationary employee, you should give the employee a reason beyond telling them that “you are fired because you are still on probation.”

Few WFOEs seem to understand these rules and even fewer seem to get them right. Many try to manage their China-based employees from afar in a foreign (especially U.S.) style that does not work for China, without China-centric employment contracts or China-centric employer rules and regulations. These WFOE employers consistently fail to maintain records of employee behaviors/performances in a way they can later use in their favor in an employment dispute.

China employment cases are rife with examples of foreign employers that lost and lost big because they did not understand employee probation periods. Chinese employees know this and they are quick to sue when terminated during their probation period.

In a fairly recent case in Shanghai (which is actually more pro-employer than most cities in China), a foreign employer sought to have the court overturn a labor arbitration ruling finding the employee had been wrongfully terminated during the probation period. The employer argued that the employee was emotional at work, had on many occasions read magazines unrelated to work, and did not possess the professional skills expected for  the job. The employer also argued the employee failed to pass his evaluations during the probation period. The Second Intermediate People’s Court rejected the employer’s arguments, noting that the employer failed to put forth any real evidence to prove an evaluation of this employee had actually occurred and it ordered the employer to pay damages to its former employee for unlawful termination of the employment contract.

Because employers in China must prove the grounds of termination even during a probation period and because there is no legal basis for unilateral termination the safest way for an employer to terminate its probationary employees is via a mutual termination agreement. This usually involves the employer giving the terminated employee a small severance payment in exchange for the employee’s voluntary departure. This mutual termination agreement should be in Chinese and it should include provisions making clear that the terminated employee is releasing the employer from any future claims. If the employee refuses to agree to such an agreement (this almost never happens), the employer essentially has the following two courses of action:

  1. Inform the employee that he or she is being terminated, and then sit back and wait for a potential labor arbitration, or
  2. Continue to employ the employee throughout the employment specified in the employee’s contract.

Can you extend the probation period? As is true of so much of China employment law, that  depends on the locale. But this is not something you want to get wrong because in some locales, extending the probation period is just about the worst thing you can do. And keep in mind that even if your extending the probation period is legal, you as the employer still must prove cause for any eventual unilateral termination.

Bottom line: China probationary periods are neither what they used to be nor what they seem to be.  If you are unsure whether you are using your China employee probation periods correctly, now is the time to find out.

Categories: Chinese IP

Copyright Protection in China – It’s Real, and It’s Spectacular

China Law Blog - Mon, 05/22/2017 - 07:43

Okay, maybe not spectacular. But definitely real.

An article in yesterday’s Wall Street Journal, How a Plague on the Movie and Music Industries Became Their Chief Protector in China: Chinese search giant Baidu’s transition to creator and buyer of content has changed its priorities, sums up the change that is happening with China IP protection and enforcement:

Chinese search giant Baidu Inc. BIDU 3.47% was once a scourge of Hollywood and the U.S. music industry, which accused it of being a pipeline for pirated content.

Today when Baidu is involved in a copyright infringement case, chances are it is the one casting the blame.

Baidu’s about-face in the copyright fight reflects its emergence as a creator and buyer of content, a transition that continued recently when the company struck a deal to license original shows from Netflix Inc. NFLX 0.85% Other Chinese media companies are undergoing similar transformations, upending how entertainment is protected in the world’s second-largest economy, legal analysts say.

This article quotes Mathew Alderson, our lead China media and entertainment lawyer on how intellectual property protection in China is moving from something that was formerly done to make foreign companies and governments happy to something China now sees as economically important.

“One of the old rationales for copyright protection…is that it provides an incentive to invest. We are seeing that in play here in China,” said Mathew Alderson, a partner and entertainment lawyer at Harris Bricken in Beijing. “Copyright is no longer something imposed on China by the U.S. It is now a tool in Chinese hands.”

The Wall Street Journal notes that in the last ten years China’s courts have seen a 15-fold increase in copyright-related lawsuits:

One way to measure the change is by the escalating flood of lawsuits aimed at protecting intellectual property.

Nearly 87,000 copyright-related cases were filed in China last year, according to data compiled by China’s Supreme People’s Court, a 15-fold increase from 2006. These cases include claims of illegal distribution, or unauthorized reproduction, of written content, videogames, movies and TV shows.

And here’s the point that stems from this massive increase in copyright lawsuits in China: the companies that are bringing these lawsuits are not doing so for their health. They are spending time and money on these lawsuits because they believe that the economic rewards from doing so will be greater than their costs. They have rationally decided that China’s enforcement of its copyright laws warrants this conclusion.

All this is leading to big changes in how Hollywood and Western TV studios are handling their content these days, with most of them choosing to license their content to Chinese companies (like Baidu and Tencent), rather than work at getting that content into China on their own:

For Hollywood studios, striking deals with Chinese partners is much easier than trying to defend their copyrighted content on their own, said Eric Priest, a University of Oregon School of Law professor who researches copyrights and the Chinese entertainment industry.

“If you’re a content producer with an office in Hollywood, you aren’t going to be familiar with where Chinese netizens are getting unlicensed content,” Mr. Priest said. “You won’t be familiar with the shadowy set-top manufacturers who are installing apps that people buy that allow direct access to unlicensed content. You’re going to be much better off with a partner in China that can do that.”

 

Also just last week, a Beijing court awarded Tencent more than US $1 million in damages in a copyright infringement case. The defendant in the case was Baofeng Technology, a high-profile streaming site and manufacturer of VR hardware. Baofeng has been found liable for copyright infringement numerous times previously (including for unauthorized distribution of films, television, and the most recent World Cup), but that’s surely in part because it’s so visible. After its 2015 IPO on the Shenzhen exchange, Baofeng soared to a valuation of more than US$8 billion, and although its current valuation is closer to US$1 billion, it is a real company, with real assets.

In the case decided last week, Baofeng was found to have streamed the first 6 episodes of season 3 of The Voice of China without permission from Tencent, which had licensed exclusive streaming rights. The Voice of China (or whatever name it’s going by these days) is one of the most popular programs in China and it generates significant revenue for all of the companies involved with it. Tencent wanted to protect its investment.

Tencent’s victory in the litigation regarding The Voice of China is of a piece with other recent lawsuits regarding enforcement of motion picture copyrights in China, including Disney’s victory over a film that ripped off the anthropomorphic vehicles from Cars, decisions holding private cinema operators liable for exhibiting content without permission, and the recent controversy and lawsuit regarding Wolf Warriors 2. Copyright owners in China no longer have to just grin and bear it.

I hate to say we told you so on this, but we told you so on this Way back in early 2013, in China Intellectual Property Law. A Radio Interview For World Intellectual Property Rights Day, Dan Harris of my firm predicted that this day would come and explained why:

China is a lot better compared to ten years ago. I think very little of that has to do with the WTO. I think that China is better because China is getting wealthier, and because Chinese companies are starting to care more about IP. I am of the view that countries start doing well with IP when its own powerful companies really start caring about it. And I’ve seen this progression happen in Japan, I’ve seen this progression happen in Korea, I’ve read about how this progression happened in the United States. The reality is nobody is going to be able to force China to improve its IP from the outside, but big companies within China like Haier, like Huawei, like Lenovo — companies that care about their own IP — are going to be able to force China to improve. That’s what’s happening. And as more big companies come to the fore in China, China’s IP is going to continue to improve. And there’s not much that can be done to rush it. In fact, if anything China’s IP is improving nicely. Meaning, it’s improving at least as fast as Korea’s did, at least as fast as Japan’s did, and probably as fast as the US’s did, but the US was a long time ago.

In other words, China — like pretty much most countries, is a lot more likely to do what it perceives to be in its own self interest than to do something just because other countries are telling it that it should/must.

Granted, the legal principles in these cases are straightforward and from what I’ve seen, the facts patterns leave little room for interpretation. When the defendants explain why they weren’t infringing the copyright, they tend to sound like Vanilla Ice explaining why “Ice Ice Baby” wasn’t a blatant copy of “Under Pressure.” (I can’t wait to see who will be the Chinese Robin Thicke and state that they couldn’t possibly be liable for copyright infringement because they were drunk on baijiu throughout production.)

The point is not that Chinese courts are establishing new rights, but that they are enforcing the rights that already exist for copyright owners – and doing so in a meaningful way. Both Chinese and foreign copyright owners are turning to Chinese courts to enforce their rights, and are prevailing. At least with the easy cases.

In future posts, I will discuss what you can and should do to protect and enforce your copyrights in China.

Categories: Chinese IP

China Customs Violations and How to Avoid Jail Time

China Law Blog - Sun, 05/21/2017 - 05:58

A company my firm’s China lawyers represented many years ago in a China customs dispute sent me an email yesterday with an article from CBCNews, entitled, B.C. winery owners facing life in Chinese prison for smuggling. The email thanked my law firm for the customs work we did for this company many years ago involving facially similar (but actually probably very different) facts and joked about how they had narrowly avoided prison (which is not really true).

But let’s talk about the case involving the Canadians facing a long jail term. But before I discuss that case, I need to make very clear that the only facts I have about the case come from this one news article, which gives the following as factual background:

A B.C. husband and wife are facing 10 years to life imprisonment in China for allegedly under-reporting the value of wine they export to that country. And the Canadian government is under fire for not doing more to help them.

Chinese customs officials in Shanghai have charged John Chang, 62, and his wife Allison Lu with smuggling. Their trial is scheduled to begin May

Both have been under arrest since March 2016. Chang has been in jail since then. Lu was held until January, but was forced to surrender her passport and is barred from leaving China.

Their case is becoming a bit of a cause célèbre in Canada as “lawyers and politicians lining up behind the couple describe their detention as outrageous, excessive and a gross violation of personal liberty and security.” The couple own Lulu Island Winery, which before the couple’s arrest claimed its exports accounted “for almost 20 per cent of all Canadian wine exported to China.” “The allegations are that ‘a certain brand of ice wine in Canada’ had been declared at around 10 Yuan a bottle (under $2 Cdn), when it was worth many times that amount.”

Their case is viewed by many in Canada as a political one and calls are going out to get Prime Minister Justin Trudeau to intervene. One Canadian politician is quoted as saying “the Trudeau Liberals are mishandling the case by treating it as a consular issue, instead of a serious trade dispute.” The Canadian lawyers for the couple have also expressed their dissatisfaction with the Canadian government not “holding China customs to account.” Interestingly, the lawyers also submitted a briefing paper to the Canadian government that “hints the couple became a target of Chinese wrath because they maintained their innocence” and further stating that “‘many other foreign wineries…were similarly charged but released shortly after admitting to the under–reporting and paying…fines.’ it says. Mr. Chang and Ms. Lu denied violating Chinese rules and were subsequently denied bail.” The briefing paper also warned that the conviction rate in China for criminal offences is nearly 100 per cent.

We used to write fairly often about foreigners getting caught for China customs violations but we mostly stopped as the number of such incidents went into a precipitous decline as the world economy picked up and as foreigners (at least from the countries from which my firm’s China lawyers get most of our clients — North and Latin America and Europe and Australia) seemed to realize it was not worth the risks to violate China’s customs laws. But since Trump’s election we have seen an uptick in China customs problems — at least for U.S. companies and it appears China is realizing anew that getting tough on customs violations is a good way to earn hard currenices. But in terms of how to avoid China customs problems, what we wrote back then holds true now and I will quote extensively from a 2013 post, entitled, China Customs Problem? Keep Your Mouth Shut!

I try hard not to be an ass, but sometimes it is impossible. The other day it was impossible.

Months ago, a company wrote me because it was having a problem with one of their employees. This employee had left the company and at that moment, the company realized it should have made this employee sign various trade secret agreements long ago. They came to me for some help and I essentially told them that they had left the barn door open and the horse had sprung free and now about all that we could do was try to get the horse back by using a lot of sugar. Well, I didn’t really use such a stupid farm analogy, but you get the point.

At the end of their email, they mentioned that they were also being investigated by Chinese customs. To which I told them that they should stop right there and retain experienced professionals to assist them. I then regaled them with horror story after horror story of clients who had come to us after having cooperated with Chinese customs, only to have Chinese customs “turn” on them and threaten them with criminal actions, after having seen the documents. I stressed that they should treat any Chinese customs investigation as a criminal investigation and act accordingly.  hey assured me that they would. I told them not to reveal anything to China customs as “anything can and would be used against them.” They assured me that they would act accordingly.

Just got an email from them saying that they had spoken with China customs about their problems but they were confident everything will work out just fine. My response was somewhat along the lines of how I had just thrown a lit match into a can of gasoline but everything would be fine. Well, I didn’t really use such a stupid car analogy, but you get the point. Anyway, I cannot reveal more because the matter is still ongoing, but I am a lot less optimistic than they are about how it will all get resolved. Maybe the can won’t explode. Maybe.

So what is the point? The point is that no matter how warm and fuzzy you want to get with China customs, they have zero desire to get all warm and fuzzy with you. Their goal is to fine you as much as they can and then maybe just toss you in jail for good measure.Their goal is to make their quotas and you are their quota. I am not kidding. If China customs comes gunning for you, seek help and fast. Why the weird picture of Kim Jung Un? Two reasons. One, Kim Jung Un looks so warm and fuzzy but he isn’t. Two, I just figured I needed to do something/anything out of the ordinary to get people to listen on this point.  

For more on this, please check out and read China’s Detention Of Foreigner For Alleged Customs Violation Should Be A Strong Warning

So what can you do to avoid a major China customs problem? The following is the bare minimum:

  1. Do not underreport or in any other way lie to China customs. China customs has gotten really good at discovering the truth and they — like pretty much everyone else — do not like those who try to dupe them. What always shocks me is not that the companies that come to us after having been caught were caught by China customs, but their shock at having gotten caught. Guess what, if your website says that you sell your widgets for USD$1850 and you declare them with China customs as being worth USD$450, you will get caught, and probably sooner rather than later. That is not to say that you might not have a basis for the widely different pricing as you might. In fact, our China customs lawyers have twice convinced China customs officials that the reason for the widely different pricing was that the product sold imported and sold into China was actually a stripped down version of what China customs saw on our clients’ websites. But if you do not have any basis, you are in trouble. And guess what else: saying that everyone else does it or saying that your Chinese general manager told you to do it will not help you one bit. It actually will hurt you.
  2. If China customs seems to be coming after you, you must assume that China customs is indeed coming after you and the odds are good they are thinking about criminally prosecuting you. In other words, if China customs starts hinting that it questions something you did, they are talking to you to gather up evidence to proceed criminally. And at this point there are only two things you should do: shut your mouth and get a good lawyer.
  3. Oh, and if you did violate China customs laws, it oftentimes makes sense not to claim innocence because as the article about the winery couple implies, China goes much easier on those who confess and repent than on those who do not. But before you admit anything, get a lawyer because there are right ways to admit to things and wrong ways to admit to things.

Be careful out there.

Categories: Chinese IP

Suing Chinese Companies and Citizens in the United States and in Canada: When it Makes Good Sense

China Law Blog - Sat, 05/20/2017 - 07:27
It’s a small world after all.

A German lawyer for a German company owed money — lots of money — wrote me last week to discuss retaining my law firm to try to collect on its debt by seizing U..S and Canada real property believed to be held by its Chinese citizen debtor. This lawyer was coming to me because he had liked my quotes in a Vancouver Sun article from last year, entitled, More Chinese cases target property in B.C., say lawyers.*

The headline of this article is 100% correct, but the increase in lawsuits targeting properties in both the United States and Canada is not due to any change in laws; it’s due to the increase in the number of properties held by Chinese nationals in the United States and in Canada. And these lawsuits involving United States and Canadian courts stem at least in part from the trust so many have in the efficacy of our two legal systems.

At least ten years ago, the Tokyo’s Yomiuri Shimbun interviewed me for an article, entitled, “The Americanization of Law,” [the link no longer exists]. The thesis of that article was that American law and American lawyers influence business laws the world over. Call it Americanization or whatever else you want, but the trend towards an overall liberalization of laws is so common as to be almost inexorable. That article focused on how companies in countries with less developed legal systems so often will engage in legal gyrations to get their cases heard by U.S. judges. That article mostly focused on how Russian and Korean companies were using the U.S. courts to sue other Russian and Korean companies and then seize their assets in the United States. This use of United States and Canada courts has not changed.

Anyway, back to the Vancouver Sun article, which has a somewhat similar thesis:

Lawyers say they are seeing a substantial increase in B.C. court cases filed by Chinese companies seeking to seize real estate assets from Chinese immigrants in B.C.

The Chinese plaintiffs are asking B.C. judges to enforce monetary judgments awarded in Chinese courts. These Chinese rulings typically involve people found in China to have defrauded Chinese banks or business partners and then fled to Canada with the money and invested in real estate here.

The rapid rise in the numbers of Chinese cases in Canada and the U.S. — two preferred destinations, according to the Chinese government, for financial fugitives — has also been recognized by Dan Harris, a Seattle lawyer who advises international law firms on strategies for recovering assets from Chinese defendants.

Such cases have been trickling into B.C. courts for several years, including a 2015 B.C. Supreme Court award of $670 million to the Bank of China against money allegedly laundered through buying multiple homes and setting up bank accounts in Richmond.

But, according to Vancouver lawyer Christine Duhaime, a precedent-setting case in June appears to have opened the flood gates.
Duhaime says that after her client, China Citic Bank, won a so-called Mareva injunction from B.C. Supreme Court, prohibiting the sale of four Vancouver-area homes worth $7.2 million, calls from China poured in. The homes belong to a couple who were alleged to have “fled China” with an unpaid $10-million loan.

Duhaime says she understands this is the first case of a Mareva injunction, also called a freezing order, being won by a Chinese bank in North American courts. Such injunctions prevent assets from being sold before a court can rule on whether they should be used to repay a court award.

Based on the case, Duhaime says she has obtained information from China alleging that “billions of dollars” of bank fraud proceeds are invested in B.C. real estate. She said she could not share the documents for reasons of client privilege.

Many years ago, my law firm represented a former Hong Kong police officer who had left Hong Kong maybe thirty years earlier, under a cloud of suspicion for having engaged in large-scale corruption. The City of Hong Kong had somehow learned that this police officer now owned substantial properties in Washington State and in California and it sued him to get that property.

The litigators at my law firm have litigated a large number of similar cases over the years, mostly involving private, not government, litigants. In many of those cases (most?) the plaintiff has chosen the United States as its venue from a whole host of options, including its home country, simply because it believes the United States courts are most effective in rendering judgments and — even more importantly — having the capability to collect on those judgments by seizing assets. Many years ago, we were retained by an American company to enforce its Chinese judgment against a Chinese company in a California court. Its thinking — which was absolutely correct — was that it had spent years trying to collect against this powerful Chinese company, based in what was for China a small town and it would never succeed there. So we were tasked with turning the Chinese judgment into a United States judgment and then seizing product from the Chinese company as it came into the United States and payments to the Chinese company as they left the United States. These sorts of cases are also becoming more common.

What’s so interesting about the Vancouver Sun article though is how it reveals the pent-up demand for lawsuits by Chinese companies against Chinese citizens with property in British Columbia:

“The (Citic) Mareva case absolutely increased the interest in China, and caused a number of banks in China to reach out to us and say ‘We have all these cases. Can we do something in B.C., too?’” Duhaime said. “There is lots of cases coming down the pipe, and there is lots of appetite in China from the government, down to the banks, to come to B.C. to enforce judgments.”

In the Citic case, the defendant, Shibiao Yan, a citizen of China, is now seeking to overturn the Mareva injunction. Yan argues Mareva is a “harsh and exceptional remedy that should only be available in the clearest of cases,” according to B.C. legal filings. Yan’s lawyers did not respond to a request for comment on the case.

Duhaime says as the Citic case continues, her law firm is already working on new cases.

“One of our next projects is a Toronto house we are looking at, worth $100 million,” Duhaime said. “A guy went to a bank in China, defrauded them, got a loan and all the money in one day, and moved to Canada and got a mansion. And no one asked any questions, even though he never worked a day in Canada. It’s all the same type of story, where a foreign national doesn’t have a job, but is living in homes in Canada and owes money to a bank in China.”

Another Canadian lawyer expects these cases to increase as well:

McGowan said that he could not speak specifically about the case. But he told Postmedia that he anticipates a growing wave of legal actions from Chinese citizens seeking to recover debts by targeting B.C. properties.

“What I can say generally is that I’ve seen and I’m anticipating seeing a lot more claims like this,” McGowan said in an interview. “The amount of inflow litigation from China is substantial. I think the Chinese are starting to appreciate there is an opportunity to make recovery on their losses in China … against people who have immigrated to Canada.”

I then seek to explain the reasons for increased interest in pursuing Chinese-owned assets overseas:

Harris, the Seattle lawyer, said he agrees with the Vancouver lawyers “100 per cent” that cases from China are rapidly increasing.

“There is an influx of these cases because they are in some ways so easy to bring in the U.S. and in Canada,” Harris said. “And, more importantly, they are so easy to collect on, unlike in China, where winning a case is one thing but collecting on the judgment is another.”

Harris said his firm is often approached by Canadian and U.S. lawyers seeking to recover assets from companies and people in China. He advises these lawyers to seek out assets owned by the litigation targets outside China and then take action “in other countries with more effective legal systems for collecting on court judgments or arbitration awards.”

But just to clarify. Suing Chinese individuals and companies in the United States or Canada makes terrific sense if they have assets in the United States or in Canada, but it will probably not make sense if they do not. One more thing you should know, however, is that it is very easy to get a judgment in the United States and then take that judgment to Canada and turn it into a Canadian judgment, and vice-versa. So if you are owed money by a Chinese national or a Chinese company that has assets in both Canada and the United States, you probably will be able to get away with suing in just one of the two countries and using your victory in that one to collect on assets in both.

Isn’t international litigation fun?

 

* It turned out that the Chinese citizen did not own any property in the United States or in Canada — or at least any that the German company’s private investigator could find — which is what allows me to mention this matter here. I also changed the facts a bit as further camouflage.

 

Categories: Chinese IP

See You In Barcelona at INTA

China Law Blog - Thu, 05/18/2017 - 07:59

If you are going to be in Barcelona during INTA 2017, please let us know via an email to firm@harrisbricken.com and we will do our utmost to have one of our lawyers meet up with you there. Four of our lawyers will be there throughout the conference, including two of our lawyers from our Barcelona office, Nadja Vietz and Joaquin Cabrera. In addition to our home-grown talent, Mike Atkins (world famous for his Seattle Trademark Lawyer Blog) and Alison Malsbury (who spoke at INTA last year on cannabis trademarks) will also be attending. 

Please don’t tell anyone, but our having a Barcelona office means we know all the good places to go, including those that will not be overwhelmed by INTA hordes.    As much as our China lawyers, including me, wanted to go to Barcelona for INTA in the end, work prevailed and we will all be in China or the United States for the duration.

国际商标协会2017年年会将于 5月20日-24日在西班牙巴塞罗那举行。我们衷心希望通过本次年会结识更多国际业界人士并建立友好关系。如果您也会去巴塞罗那参加此次年会,欢迎发送电子邮件到firm@harrisbricken.com 与我们联系, 我们会尽全力安排我们的律师和您在巴塞罗那见面。除了我们巴塞罗那办公室的两位律师Nadja VietzJoaquin Cabrera之外,西雅图总部的Mike AtkinsAlison Malsbury也会前往参会。Mike是拥有多年执业经验的西雅图商标律师,常年在著名的西雅图商标律师博客上发表商标法相关文章。另一位律师Alison 则在去年的国际商标协会年会上就大麻行业的商标法律问题发表演讲。

另外,我们的巴塞罗那同事熟知当地景点和文化,他们能告诉您本地人喜欢的去处,避开过于拥挤的热门旅游景点,帮助您了解巴塞罗那独特的魅力所在。

尽管我们的中国法律师(包括我自己)都非常希望前往巴塞罗那参与这次年会,但由于实在无法从工作中抽身,我们还会继续在美国和中国为您提供服务。

Sollten Sie an INTA 2017 in Barcelona teilnehmen, geben Sie uns bitte per E-Mail an firm@harrisbricken.com Bescheid und wir würden uns freuen, ein Meeting mit einem unserer Anwälte organisieren zu können. Vier unserer Anwälte sind während der Konferenz in Barcelona, einschliesslich unsere “spanischen” Anwälte aus unserem Barcelona Büro, Nadja Vietz und Joaquin Cabrera. Zusätzlich zu unserem Barcelona Team werden Mike Atkins (bekannt für seinen Seattle Trademark Lawyer Blog) und Alison Malsbury (welche bei INTA im vergangenen Jahr über Cannabis Branding vortrug) teilnehmen. Bitte tragen Sie dies nicht weiter, aber da wir unser lokales Team haben, kennen wir auch all die Geheimtipps an sehenswerten Plätzen, welche nicht mit INTA Teilnehmern überfüllt sind. So sehr unsere China-Anwälte, mich inbegriffen, an INTA hätten teilnehmen wollen, ging die Arbeit am Ende vor und wir werden nicht teilnehmen, sondern in China oder den USA sein. Si va a estar en Barcelona durante INTA 2017, por favor háganoslo saber a través de un correo electrónico a la siguiente dirección: firm@harrisbricken.com y haremos todo lo posible para que uno de nuestros abogados se pueda reunir con Vd. Cuatro de nuestros abogados estarán en Barcelona a lo largo de la conferencia, entre ellos dos de nuestros abogados de nuestra oficina de Barcelona, Nadja Vietz y Joaquín Cabrera. Además de nuestro talento de Barcelona, asistirán también Mike Atkins (famoso por su Seattle Trademark Lawyer Blog) y Alison Malsbury (que habló en INTA el año pasado sobre marcas de cannabis). Por favor, no se lo digas a nadie, pero nuestro tener una oficina en Barcelona significa que conocemos todos los buenos lugares para ir, incluyendo aquellos que no serán superpoblados con participantes de INTA. Aunque nuestros abogados del departamento chino, incluido yo, quisiéramos ir a Barcelona para INTA, el trabajo prevaleció al final y todos estaremos en China o los Estados Unidos por la duración.
Categories: Chinese IP

China Employee Terminations when Economic Circumstances Change

China Law Blog - Wed, 05/17/2017 - 09:31
China employment law: know the rules

Terminating a China-based employee usually requires good cause. A serious breach of employer rules and regulations can be a basis for an employer’s unilateral termination of an employee, but China employers have other options as well.

A China-based employer may terminate an employment contract if the economic circumstances which formed the basis for the parties’ having signed the employment contract in the first place have changed, causing the employer to be unable to perform under the contract. This sort of termination is permitted only after negotiations between the employer and employee have proven they are unable to reach an agreement on amending the contract. But does this sort of termination really work? As with just about everything related to China employment law that will depend on whether the employer handled the termination 100% correctly and a bit on the locale as well. See China Employment Law: Simple Questions and Complex Answers.

 Let’s look at an actual case out of Zhejiang province. The employer and employee signed an open-term employment contract in 2010 for the employee to work in a managerial position in Hangzhou. During the term of employment, the employer decided it needed to shut down the department this employee managed so as to cut costs. The employer provided its shut-down plan to its labor union for comments. The employer then notified the managerial employee in writing of its decision to close down his department and directed the employee to report to a new position, with pay and performance standards essentially the same as the managerial employee’s existing position. The employer’s notice clearly informed the employee that if he failed to report to his new position within a specified period, the employer would not be able to assign him to a similar position and would instead have to terminate his contract. The employee refused to cooperate as directed and the employer then prepared a notice to terminate the employee’s contract and it provided notice to the company’s labor union for comments. The notice made clear the basis for the employee’s termination was the employee’s failure to abide by the employer’s new position assignment coupled with the employer’s inability to accommodate this employee with another similar position. These circumstances caused the parties to be unable to perform under the existing employment contract and after negotiations, the parties were unable to reach agreement on amending the original contract. The employer tried to serve the employee with  his termination notice in person, but the employee refused to accept it, so the employer sent notice to the employee’s last known contact address by mail. The employer also published the termination notice in the daily newspaper and paid the employee an additional month’s wage as severance based on his years of service. The employee sued for unlawful termination and demanded reinstatement of his position.

The courts sided with the employer and ruled as follows. After the employer decided to shut down the employee’s department and eliminate the employee’s original position, the employer provided the employee with notice specifying (1) his new position, (2) the new payment standard (which would not reduce his take-home pay one Yuan) and (3) the requirement that he report to his new position or be terminated for failing to cooperate. The employer also repeatedly asked the employee to report to the new position. The court held that the employer had handled the termination correctly and ruled entirely in the employer’s favor.

This case almost certainly would have turned out very differently had this employer not been so punctilious in following all the procedural requirements for a termination due to economic circumstances. This employer did not go full speed ahead and unilaterally terminate the employee right after it made the decision to eliminate his position. It instead got its labor union to sign off on its plan and then it sought to give the employee a similar position with similar pay.

Keep in mind that terminations because of economic circumstances require the employer pay their terminated employees statutory severance. And as always, it is important to check the local requirements before you terminate an employee.

 

Categories: Chinese IP

Trump’s Steel and Aluminum National Security Investigations Against China and Others are not a Good Thing

China Law Blog - Tue, 05/16/2017 - 08:23

The Trump administration just launched two investigations to see if steel and aluminum imports threaten to impair the national security of the United States. Because these investigations were self-initiated by the Trump administration, many believe it pre-ordained that some type of import restrictions will be imposed. But here are a few reasons why imports should not be restricted, from China or from anywhere else.

Past Section 232 determinations indicate steel/ aluminum imports are not a “national security” threat. Only 26 investigations have ever been conducted under Section 232 of the Trade Expansion Act of 1962. Prior Section 232 investigations defined “national security” as covering not only a military or national defense component, but also the general security and welfare of certain industries “critical to the minimum operations of the economy and government.” Most (19 out of 26) resulted in either a finding of no national security threat or no action taken in any way. Only crude oil from Libya and Iran were found to be a national security threat that warranted some type of import restrictions.

The most recent Section 232 investigation concluded in October 2001 and it was also on steel. Even taking into consideration the national security requirements of the post 9/11 campaign against terrorism, the Department of Commerce (DOC) found that imported steel did not threaten to impair U.S. national security. In that report, the DOC found that the entire US military’s steel requirements was less than one percent of the domestic steel industry’s production capacity. DOC concluded (1) that the U.S. was not dependent on imported steel, and (2) that steel imports did not threaten the ability of domestic producers to satisfy any US national security requirements for steel.

Current steel and aluminum data are similar to those considered in the 2001 steel national security investigation. Only 30% of imported steel and aluminum was used in domestic consumption in 2016, showing a lack of dependence on steel and aluminum imports. Even if current US military requirements for steel have doubled from 2001 requirements, this would still be less than one percent of the 88 million tons of steel produced in the United States in 2016. The objective data shows steel and aluminum imports do not pose a threat to national security interests. National security should not be used as a pretense for protectionism.

Import restrictions would harm downstream US manufacturers. Additional tariffs, quotas, or other import restrictions may temporarily create a pocket of artificially higher U.S. market prices for steel and aluminum, particularly when compared to the lower prices in the much larger global market. This may provide a short-term benefit to US steel and aluminum producers who would have substantially less competition after import restrictions are imposed. But downstream US manufacturers who use steel and aluminum to produce cars, air conditioners, washing machines, airplanes, and a host of other industrial and consumer goods will either bear any increased costs and disrupted supply chains, or pass those increased costs down to the ultimate buyer/consumer in the form of higher prices. For every one US manufacturing job saved at a US Steel or Alcoa, sixteen US manufacturing jobs at a Ford, Carrier, Whirlpool, or Boeing, will be put at risk, because their foreign competitors would gain a cost advantage over them because of the import restrictions driving up the U.S. steel and aluminum prices they need to make their cars, air conditioners, washing machines or airplanes. The Trump administration specifically noted that shipbuilding, aircraft and vehicles may also become subject to a national security investigation. But any import restrictions imposed to protect the steel industry would adversely affect these other critical industries that may have to deal with higher steel and aluminum costs. The collateral damage caused by any Section 232 measures could be significant.

How do you distinguish “good” imports from “harmful” imports? Canada is by far the largest source of steel and aluminum imports.  A good number of Canadian producers are affiliates of US steel and aluminum producers. Chinese steel imports ranked 11th out of all 2016 imports and represented less than one percent of U.S. domestic production. The U.S. actually exported more aluminum to China (730,355 tons) than it imported (518,773 tons) in 2016. In the current 232 investigations, the USW has already asked that Canada be excluded from any import restrictions.  “China’s the problem, not Canada or other countries which are following the rules,” said USW President Leo W. Gerard. Presumably Canadian imports are usually considered among the “good” imports. But given the recent trade flare ups with Canada involving softwood lumber, dairy, renegotiating NAFTA, and border adjustment taxes (BAT), it is no longer a given that the Trump administration will give any preferential treatment to Canada.

Import restrictions would not address the real problem of Chinese overcapacity. Any threatened import restrictions would do nothing to reduce the China’s excessive steel and aluminum production capacity. Many of Chinese steel and aluminum mills are inefficient, debt-laden “zombie” state-owned mills that need to be permanently shut down. If China doesn’t cut its production capacity and instead keeps churning out steel and aluminum and selling onto the global market, China’s surplus production will continue driving global prices down. No matter how high the United States tries to build a tariff wall, these U.S. import restrictions will do nothing to address the key cause of global price declines for steel and aluminum.

Import restrictions may trigger retaliation. Section 232 import restrictions have been referred to as the trade “nuclear option“because it is so hard to argue against measures allegedly used to protect a country’s national security interests. If the U.S. invokes “national security” to protect its steel and aluminum industries, other countries will likely claim similar national security interests to protect their own allegedly critical industries from imports. For example, China could claim its soybean industry needs protection from imported soybeans that come primarily from the United States.

Despite the harsh campaign rhetoric during the Trump presidential campaign, Trump as President recently touted the recently announced “early harvest” deal with China as “gigantic” and “Herculean” and as a reset of US-China trade relations. Though the Section 232 national security investigation would appear to be the perfect forum for Trump to single out Chinese steel and aluminum producers for indiscriminate production expansion, it is now unclear whether Trump will do so lest he jeopardize the budding relationship he has developed with President Xin Jinping. If Trump does go after Chinese steel and aluminum imports based on national security grounds, it seems certain China will retaliate and find some U.S. industry to target with its own counter-actions.

If these Section 232 investigations result in import restrictions on all steel and aluminum imports, or even just on Chinese imports, there is a very real possibility the following lose-lose scenario will ensue:

  • steel/ aluminum prices increase, but not enough for the U.S. steel/aluminum industries to improve enough to recover or add any new jobs;
  • downstream industries that use steel and aluminum get hammered by increased steel and aluminum prices and lose sales to cheaper foreign imports from companies that still have access on the global market to lower priced steel or aluminum;
  • key foreign allies get harmed by restrictions on all US imports;
  • China and other countries impose their own national security import restrictions in retaliation against the United States.

I would much prefer the DOC and President Trump come to recognize this is a weak national security case. Labelling steel or aluminum imports as a national security threat is neither necessary nor supportable by the facts. President Trump could take more moderate actions that may be enough to claim political victory while avoiding retaliation from global trading partners.

Categories: Chinese IP

China Copyright: What is a Work for Hire, and Why You Should Care

China Law Blog - Mon, 05/15/2017 - 07:53

Over the past several years, an increasing amount of creative work has been outsourced to China: everything from special effects for movies to programming for video games to architectural designs for transit-oriented developments. These creative works are protected by copyright, but not always in a way companies expect. And because so much work in China occurs without a legally enforceable contract, once companies realize their IP portfolio is not nearly as robust as they thought, it’s often too late to do anything about it.

As a general rule, the creator of an original work (e.g., a song, movie, or video game) owns the copyright in that work. This is true in the United States and in China and in most every other country in the world. The main exception to the general rule is for “works for hire,” which are works commissioned and paid for by a third party. But this is not a clear-cut exception: it depends on the facts, and it depends on which country you’re in.

In the United States, a company will own the copyright to a “work for hire” by an employee if the work was made within the scope of that employee’s employment. A company will own the copyright to a “work for hire” by an independent contractor if the work was specially ordered or commissioned for use via a signed agreement that specifically states that the work is a work for hire and such work falls into one of nine statutorily defined categories (including motion pictures, translations, tests, and instructional texts). Many commissioned works (e.g., photography, software, and product design) do not fall into one of the statutory categories, and for those the company will need to have a signed contract that explicitly assigns the copyright. Even in the absence of a signed agreement, the company can argue that it has an implied license, but that’s not a great position to be in.

In China, the presumptions are somewhat different. China’s Copyright Law states that an employee will own the copyright to anything they create during the course of employment, except for engineering designs, product designs, maps, and computer software, and other works created mainly with the employer’s resources. For all other works, the employer essentially has a two-year exclusive license to use the copyrighted material, and thereafter a non-exclusive license. If an employer (a WFOE, say) wants to impose a different requirement on its employees, it needs specific language in a signed contract with the employee that assigns all rights in any “work for hire” to the employer. That contract should be in Chinese and governed by Chinese law, and it should be signed at the beginning of employment.

For “independent contractors” (whether individuals or entities), the contractor will own the copyright unless there is a specific agreement between the parties in which the contractor agrees to assign the copyright to the commissioning entity. And yes, this contract ought to be in Chinese and governed by Chinese law also.

This all sounds reasonably straightforward but a vast number of entities – including huge multinationals – still operate in China without proper agreements with their employees, let alone their “independent contractors.” These companies are essentially operating on the honor system, and sooner or later they’re going to pay by losing valuable rights.

Categories: Chinese IP

Negotiating China M&A Deals: Watching a Bit of the Sausage Get Made

China Law Blog - Sat, 05/13/2017 - 06:58

The below is an email from one of our China corporate transactional lawyers to a client in the midst of dealing with a Chinese company interested in buying our client. Though it is from quite some time ago, I have modified it slightly to remove anything that might pass as an identifier. I pass it on because it shows a fairly typical issue that comes up when a Chinese company is seeking to buy a company overseas.

The response from the Chinese side is the normal endless negotiation approach. I doubt this is what you want, and your offer to [Chinese company made it clear this is not what you want. If you concede to their approach, your advantage is lost.

This happens often in company sales. It is not unique to China. The response depends on who is most desperate. Here is what we normally do in this situation where we are not desperate.

1. The buyer has two weeks to perform due diligence during the period required to draft an agreement.

2. If the buyer wants to extend due diligence into the period after the definitive agreement is executed, it can have an additional 2 weeks but only if they pay a substantial non-refundable earnest money deposit. “Substantial” means something like USD$ _____million or more. If they want another two weeks, it requires an additional non-refundable deposit. Chinese companies rarely agree to this kind of proposal, but if they truly believe they are onto a “good thing” (and it does appear they believe that here) they will likely pay for your company with no real due diligence at all. So you need to find out where you stand with these people.

To be clear: what the Chinese side is saying is that they don’t know anything about [client company_] and they don’t know whether they want to purchase you at all. Your position should be: [Chinese company] should be hot to purchase you or the whole project is a waste of time.

You have stated you are a terrific market opportunity for [Chinese company] and you are convinced [Chinese company] already understands this. If [Chinese company] does understand then they understand the price you are asking is a bargain and they should just pay it and be done. If they do not just accept this, you probably will need to meet with them face to face, which means key people from [Client company] need to go to China very soon to meet with the [Chinese company] players face to face. In that setting, you should understand that the Chinese company will likely be expecting you to give them a substantial price concession and so whoever travels to China on your behalf should have authority to agree on pricing; the people in China will want to negotiate with a decision maker, not a functionary.

Successful negotiations of company sales with Chinese entities typically work only if the company they are looking to buy both act like and truly do operate from a position of strength. This though means you must be willing to take the risk that [Chinese company] will walk away. The idea of a deal that is fair to both parties is for the most part foreign to Chinese companies. One side has to be on top. You need to be the side that is on top, even if that means [Chinese company] walks away. If you really believe you are giving [Chinese company] a rare market opportunity — and everything seems to align with this view — you have to believe you are “on top” and you do not need to sell to [Chinese company].

If you want, you can confirm immediately that your intent is to sell 100%. However, your offer document says just that. If they cannot read, then that is also a problem.

I note we had a similar situation here in Washington state for the sale of a company to a Spanish buyer. We took a hard line and the buyer walked away. Four months later, they returned and our client was sold at a very good price. The key was that our client did in fact own very valuable IP assets the Spanish company needed, so they came back. And when they came back we were able to say: now you understand we are not going to tolerate a low-ball price or any other nonsense; let’s just do the deal and be done with it. We did the deal in two weeks and we told all the investment banker vultures to get lost. But, the client had to take the risk that the Spanish company would never return. You may end up having to show similar patience here.

Categories: Chinese IP

China Technology Licensing Agreements: The Questions We Ask

China Law Blog - Fri, 05/12/2017 - 07:03

Chinese companies are seeking out technology wherever and however they can find it and our China lawyers have been writing a slew of China technology licensing agreements of late. Sometimes these deals come to us as China licensing deals, but other times, they come into our law firm as putative joint ventures, but after our China lawyers explain the difficulties and the costs involved in doing a joint venture our clients seek to restructure their relationship with their Chinese counter-party into a licensing arrangement.

We are big fans of China licensing deals because we have seen them be a financial stimulant for so many companies, including companies with admittedly outdated or “second tier” technology. China licensing deals can be win-win transactions because the Chinese companies and Chinese citizens get perfectly fine technologies (I presume) at a good price and the Western companies get a revenue source from a formerly moribund or nearly moribund technology.

The licensing deals our lawyers have been handling in the last year or so have mostly involved computer or industrial or medical technologies where the Chinese company wants to use the licensed technology to jump-start its own technology development. These Chinese companies initially plan to license the technology from our American or European clients as stepping-stone to building their own cheaper products in China and then later using that technology and the funds they receive from new product sales to further develop and refine (and perhaps even localize) the technology and their own products to compete better with Western companies on the high end. Sometimes though the deals are with a Chinese company that wants to put the technology to immediate use to improve on existing products they sell in China.

The below is a list of initial questions I pulled from an email (modified to eliminate anything that could possibly serve as an identifier to anyone) from one of our China IP lawyers to a client based on the licensing term sheet to which the client and the potential Chinese company licensee had signed off. The email posed some initial questions, the answers to which were necessary to allow this lawyer to being drafting the licensing agreement.

1. Territory:

a. For “China,” does this include Taiwan? Hong Kong?  Macao? These three jurisdictions all have an independent patent/trademark system. We do not use the term “China” in our agreements since it is not clear. We use the term PRC to refer only to Mainland China. Given the PRC’s aspirations, even that term is not perfectly clear. To which of these countries were you referring?

b. The term “Southeast Asia” has no precise meaning. Please identify the specific countries intended to be included. In particular, what is the status of Singapore, Indonesia, Malaysia, and The Philippines?

2. Note with respect to Territory. There are a number of separate issues:

a. Place of manufacture.

b. Place where patents/trademarks must be maintained.

c. Place where sales are permitted.

The three are quite distinct and it will be important we be clear on all three. It seems to me you are proposing the following:

a. Territory of manufacture is the PRC.

b. Territory of patents is PRC, Republic of Korea, Hong Kong and Japan.

c. Territory of sales is PRC, Republic of Korea, Japan, Taiwan, Hong Kong, Macao, Viet Nam, Thailand, Cambodia, Laos, Malaysia, Indonesia, Singapore and The Philippines?

Please advise on whether the above is correct? If yes, this will require some complex drafting. But it is doable.

3. Your statement of the license grant is a typical U.S. grant, which includes the right to sublicense. We though generally advise against giving a Chinese licensee the ability to sublicense. What is you position on this?

4. For a manufacturing license, we prefer to see our clients limit the Chinese side to manufacturing only in China at a manufacturing facility you the licensor have approved in advance. Do you agree with this?

5. This agreement is for two products. How do you want to deal with the trademarks and logos for both of these products? Will the patent license also include the associated trademarks and logos? What is the current status of registration of those marks in the applicable territories? Your controlling the trademark is a powerful way for you to control the right to manufacture and sell the products and if you have not registered your trademarks in the PRC and in the other countries in which they will be sold by your licensee, you should consider such registrations in connection with this project. Let’s discuss this.

7. In your Performance Metrics section, you raise the important issue of the obligation of [Chinese company] to pursue approvals in the appropriate territories and to engage in selling the two products in those territories. Note, however, that this is extremely complex. To list out just some of the issues:

a. What is the obligation of [Chinese company] to apply for and receive approval with respect to each of the countries in which you will be granting it the licenses? What happens if [Chinese company] receives approval in the PRC, but does not even try to secure approval in the other territories. What happens if [Chinese company] receives approval for Korea but not for the PRC? How are you intending for this to all work?

b. Is the stated sales goal just for the PRC or for the entire sales territory? Have you considered separate sales goals for each country?

c. What is the penalty to [Chinese company] if it does not achieve the performance metric. For example, what if they don’t even try for Korea? We could draft it so that you can either terminate the entire license or simply remove Korea from the territory. If the sales goal is cumulative, then you would terminate the entire license. But if the sales goal is by country, then you would remove the country from the license.

d. The same applies to your company. I doubt you mean that you must pursue patents in all of the countries listed. Am I right about this? Either way, we must be clear about this. We could perhaps clarify all this by providing for three territories:

i. Manufacturing territory: PRC.

ii. Patent territory: PRC, Republic of Korea, Hong Kong and Japan.

iii. Sales territory: PRC, Republic of Korea, Japan, Taiwan, Hong Kong, Macao, Viet Nam, Thailand, Cambodia, Laos, Malaysia, India, Indonesia, Singapore and The Philippines.

That said, we need to keep these various territories clearly demarcated.

8. In the performance metrics, you properly make clear that actively pursuing approval for sale is required for the license and you provide a hard deadline for one product. But since there are two products and as many as 15 different countries, this could get impossibly complex. We will need to provide a manageable way to keep track of two separate issues: the approvals to sell and the actual sales, for each product and for each country. There are many ways to do this. The simple way is to set an overall gross sales goal, without any specification of country of sales. If the sales goal is met, that’s the end of it. Then you can provide that if no approval is obtained for a particular region by a particular time for a particular product, you have the right to remove that country from the sales territory for that product. It seems this approach will work best but I would like to hear your thoughts on this.

9. Buy Back Right. It seems the buy back right for manufacture should only apply if [Chinese company] meets all of its obligations under the license. Do you agree?

Please consider the above and provide me with your comments and questions.

 

For more on what goes into a China licensing contract, check out:

China Licensing Agreements: The Extreme Basics.

China Licensing Agreements: Giving Your Technology a New and Profitable Life

China Difficulties, Netflix, and Why We Love Licensing

Nine Tips for China Licensing

Categories: Chinese IP

China Employee Terminations: Beware Reinstatement

China Law Blog - Thu, 05/11/2017 - 11:26

What happens if a China employer makes an employee termination decision that is later ruled unlawful? According to the Responses to Several Issues Regarding Application of Law in Trial of Labor Disputes recently released by the Beijing High People’s Court and the Beijing Labor Personnel Dispute Arbitration Committee, the answer is specific performance. In other words, if you unlawfully terminate an employee, you must reinstate that employee to his or her previous position in your company. This technically applies only to Beijing but we expect this will become the norm in many other places in China as well.

Under this new law, if the employer’s termination decision is unlawful and the employee demands reinstatement such a demand will ordinarily be granted. If the court discovers reinstatement is not possible, the employee will be instructed to bring a severance claim for the unlawful termination. What circumstances will make specific performance “impossible?” The new law provides the following guidance:

  1. The employer is declared bankrupt, has had its business license revoked, or has been ordered to close down or has decided to dissolve its entity;
  2. The employee has reached mandatory retirement age during the arbitration/litigation process;
  3. The employment contract has expired during the arbitration/litigation process, and the employer is not required by law to enter into an open-term contract with the employee;
  4. The employee’s original position is critical to the employer’s normal business operation and is of an irreplaceable nature (e.g., general manager, finance manager), and the original position has been filled, and the parties cannot agree on a new position;
  5. The employee has started working for another employer;
  6. During the arbitration/litigation process, the employer delivered a notice of reinstatement to the employee and the employee refused to accept such notice;
  7. Other circumstances that demonstrate obvious impossibility of specific performance.

As is true with many (most?) of China’s employment laws, the employer bears the burden of proving facts sufficient to invoke impossibility. Just because the employer found a replacement for the former employee, without more, it will not be sufficient for the employer to argue “specific performance is impossible.”

This new Beijing law is really not so new at all; it is more a clarification of existing law than anything else. Beijing has a longstanding reputation for a pro-employee approach and we have routinely seen cases where employers were ordered to give terminated employees their jobs back. It is important to note that employer’s cannot contract away their employees’ reinstatement rights.

Bottom Line: As a Beijing employer, you should assume reinstatement will be the norm for an unlawful employee termination, which is all the more reason to be be sure you handle all of your employee terminations lawfully. As for the rest of China, reinstatement will still largely depend on where and how.

 

Categories: Chinese IP

China Cybersecurity and Data Protection Laws: Change is Coming

China Law Blog - Wed, 05/10/2017 - 14:10
China’s new Cybersecurity Law becomes effective on June 1 China’s new Cybersecurity Law will become effective on June 1, 2017. In addition to focusing on cybersecurity, the law also details how companies are to handle personal information and data. In determining what is allowed and not allowed for handling personal information in China, it is important to examine The Decision on Strengthening Information Protection on Networks (2012), The Guidelines for Personal Information Protection Within Public and Commercial Services Information Systems (2013), and The Provisions on Protecting the Personal Information of Telecommunications and InternetUsers (2013). There are also many industry-specific rules, including such rules for banking and credit information services. China’s new Cybersecurity Law adopts and modifies existing regulations and codifies them. Under the new Cybersecurity Law, collecting any user’s personal information requires the user’s consent and network operators must keep collected information strictly confidential. Personal information is defined as information that can be used on its own or with other information to determine the identity of a natural person, including the person’s name, date of birth, ID card number, biological identification information (e.g. fingerprints and irises), address, and telephone number. Once such information has been de-identified, it is no longer subject to the requirement for personal information under the law.

According to the new Cybersecurity Law, network operators are subject to the following requirements when collecting and using personal information:

  • Collection and use of personal information must be legal, proper and necessary.
  • Network operators must clearly state the purpose, method, and scope of collection and use, and obtain consent from the person whose personal information is to be collected; personal information irrelevant to the service provided shall not be collected.
  • Network operators shall not disclose, alter, or destroy collected personal information; without the consent of the person from whom the information was gathered, such information shall not be provided to others.
  • In the event of a data breach or a likely data breach, network operators must take remedial actions, promptly inform users, and report to the competent government agencies according to relevant regulations.
  • In case of an illegal or unauthorized collection and use of personal information, a person is entitled to ask a network operator to delete such personal information; when information collected is wrong, an individual can request correction.

Who are the network operators to which the new law will apply? Owners of networks, administrators of networks, and network service providers. Telecom and Internet service providers, clearly, but “network” is broad enough to go well beyond that.

Networks are systems consisting of computers or other data terminal equipment and relevant devices that collect, store, transmit, exchange, and process information according to certain rules and procedures (Article 76 of the new Cybersecurity Law). If you have a couple of computers at home that can share files, and perhaps a printer connected to them, you technically have a network. The law is not likely to go that far, but the generic definitions of network and network operators leave a lot of room for interpretation, which is exactly how the Chinese government wants it.

The new Cybersecurity Law also requires critical information infrastructure operators (CIIOs) store within China personal information and important data gathered and generated within China and conduct annual security risk assessments regarding their data. Though the definition of CIIO is yet to be clarified, we already know China’s yet to be finalized Measures for Security Assessment of Personal Information and Important Data Leaving the Country will likely require foreign companies doing business in China make big changes in how they handle data. The Cyberspace Administration of China (CAC) published a draft of Measures for Security Assessment of Personal Information and Important Data Leaving the Country back in April, raising many concerns for foreign businesses operating in China.

These Measures for Security Assessment would expand the data localization requirement to all network operators. This would mean that pretty much all personal information and important data collected by network operators within the PRC must be stored within China and not leave China, other than for “genuine business need” and after a security assessment. And if you think you may be a network operator, you probably are.

Since the new Cybersecurity Law does not differentiate between internal and external networks, it is broad enough to include any company that owns an internal network. Will your China WFOE be able to transmit employee information back to its overseas headquarters? In China’s Cybersecurity Law and Employee Personal Information, we set out best practices for doing this, but that was written before publication of the Draft Measures. Should the Draft Measures become effective — as expected — our views on data transfers will almost certainly toughen. Foreign companies are already setting up data centers in China so as to be able to keep data local and many of our clients are looking at doing the same.

We have been reluctant to write much about data and privacy protection in China because existing laws are both unclear and in a massive state of flux. But because this is so important and because this reluctance cannot extend to a client who needs to know what it must do now with specific data, we plan to write more often about these topics in the weeks and months ahead.

Please stay tuned.

Editor’s Note: Sara Xia is an experienced lawyer with law degrees from Shanghai University of Finance and Economics and the University of Washington. Sara practiced law in China from 2010 to 2013 and then in 2015 she became licensed to practice law in California and 2016 in Washington. Sara recently joined Harris Bricken to assist our clients with their cyberlaw and corporate matters, mostly while working out of Seattle, Beijing and San Francisco.

Categories: Chinese IP

China Cybersecurity and Data Protection Law: Change is Coming

China Law Blog - Wed, 05/10/2017 - 14:10
China’s new Cybersecurity Law becomes effective on June 1 China’s new Cybersecurity Law will become effective on June 1, 2017. In addition to focusing on cybersecurity, the law also details how companies are to handle personal information and data. In determining what is allowed and not allowed for handling personal information in China, it is important to examine The Decision on Strengthening Information Protection on Networks (2012), The Guidelines for Personal Information Protection Within Public and Commercial Services Information Systems (2013), and The Provisions on Protecting the Personal Information of Telecommunications and InternetUsers (2013). There are also many industry-specific rules, including such rules for banking and credit information services. China’s new Cybersecurity Law adopts and modifies existing regulations and codifies them. Under the new Cybersecurity Law, collecting any user’s personal information requires the user’s consent and network operators must keep collected information strictly confidential. Personal information is defined as information that can be used on its own or with other information to determine the identity of a natural person, including the person’s name, date of birth, ID card number, biological identification information (e.g. fingerprints and irises), address, and telephone number. Once such information has been de-identified, it is no longer subject to the requirement for personal information under the law.

According to the new Cybersecurity Law, network operators are subject to the following requirements when collecting and using personal information:

  • Collection and use of personal information must be legal, proper and necessary.
  • Network operators must clearly state the purpose, method, and scope of collection and use, and obtain consent from the person whose personal information is to be collected; personal information irrelevant to the service provided shall not be collected.
  • Network operators shall not disclose, alter, or destroy collected personal information; without the consent of the person from whom the information was gathered, such information shall not be provided to others.
  • In the event of a data breach or a likely data breach, network operators must take remedial actions, promptly inform users, and report to the competent government agencies according to relevant regulations.
  • In case of an illegal or unauthorized collection and use of personal information, a person is entitled to ask a network operator to delete such personal information; when information collected is wrong, an individual can request correction.

Who are the network operators to which the new law will apply? Owners of networks, administrators of networks, and network service providers. Telecom and Internet service providers, clearly, but “network” is broad enough to go well beyond that.

Networks are systems consisting of computers or other data terminal equipment and relevant devices that collect, store, transmit, exchange, and process information according to certain rules and procedures (Article 76 of the new Cybersecurity Law). If you have a couple of computers at home that can share files, and perhaps a printer connected to them, you technically have a network. The law is not likely to go that far, but the generic definitions of network and network operators leave a lot of room for interpretation, which is exactly how the Chinese government wants it.

The new Cybersecurity Law also requires critical information infrastructure operators (CIIOs) store within China personal information and important data gathered and generated within China and conduct annual security risk assessments regarding their data. Though the definition of CIIO is yet to be clarified, we already know China’s yet to be finalized Measures for Security Assessment of Personal Information and Important Data Leaving the Country will likely require foreign companies doing business in China make big changes in how they handle data. The Cyberspace Administration of China (CAC) published a draft of Measures for Security Assessment of Personal Information and Important Data Leaving the Country back in April, raising many concerns for foreign businesses operating in China.

These Measures for Security Assessment would expand the data localization requirement to all network operators. This would mean that pretty much all personal information and important data collected by network operators within the PRC must be stored within China and not leave China, other than for “genuine business need” and after a security assessment. And if you think you may be a network operator, you probably are.

Since the new Cybersecurity Law does not differentiate between internal and external networks, it is broad enough to include any company that owns an internal network. Will your China WFOE be able to transmit employee information back to its overseas headquarters? In China’s Cybersecurity Law and Employee Personal Information, we set out best practices for doing this, but that was written before publication of the Draft Measures. Should the Draft Measures become effective — as expected — our views on data transfers will almost certainly toughen. Foreign companies are already setting up data centers in China so as to be able to keep data local and many of our clients are looking at doing the same.

We have been reluctant to write much about data and privacy protection in China because existing laws are both unclear and in a massive state of flux. But because this is so important and because this reluctance cannot extend to a client who needs to know what it must do now with specific data, we plan to write more often about these topics in the weeks and months ahead.

Please stay tuned.

Editor’s Note: Sara Xia is an experienced lawyer with law degrees from Shanghai University of Finance and Economics and the University of Washington. Sara practiced law in China from 2010 to 2013 and then in 2015 she became licensed to practice law in California and 2016 in Washington. Sara recently joined Harris Bricken to assist our clients with their cyberlaw and corporate matters, mostly while working out of Seattle, Beijing and San Francisco.

Categories: Chinese IP

China Cybersecurity and Data Protection Laws: Change is Coming

China Law Blog - Wed, 05/10/2017 - 07:03

China’s new Cybersecurity Law will become effective on June 1, 2017. In addition to focusing on cybersecurity, the law also details how companies are to handle personal information and data. In determining what is allowed and not allowed for handling personal information in China, it is important to examine The Decision on Strengthening Information Protection on Networks (2012), The Guidelines for Personal Information Protection Within Public and Commercial Services Information Systems (2013), and The Provisions on Protecting the Personal Information of Telecommunications and Internet Users (2013). There are also many industry-specific rules, including such rules for banking and credit information services. China’s new Cybersecurity Law adopts and modifies existing regulations and codifies them.

Under the new Cybersecurity Law, collecting any user’s personal information requires the user’s consent and network operators must keep collected information strictly confidential. Personal information is defined as information that can be used on its own or with other information to determine the identity of a natural person, including the person’s name, date of birth, ID card number, biological identification information (e.g. fingerprints and irises), address, and telephone number. Once such information has been de-identified, it is no longer subject to the requirement for personal information under the law.

According to the new Cybersecurity Law, network operators are subject to the following requirements when collecting and using personal information:

  • Collection and use of personal information must be legal, proper and necessary.
  • Network operators must clearly state the purpose, method, and scope of collection and use, and obtain consent from the person whose personal information is to be collected; personal information irrelevant to the service provided shall not be collected.
  • Network operators shall not disclose, alter, or destroy collected personal information; without the consent of the person from whom the information was gathered, such information shall not be provided to others.
  • In the event of a data breach or a likely data breach, network operators must take remedial actions, promptly inform users, and report to the competent government agencies according to relevant regulations.
  • In case of an illegal or unauthorized collection and use of personal information, a person is entitled to ask a network operator to delete such personal information; when information collected is wrong, an individual can request correction.

Who are the network operators to which the new law will apply? Owners of networks, administrators of networks, and network service providers. Telecom and Internet service providers, clearly, but “network” is broad enough to go well beyond that.

Networks are systems consisting of computers or other data terminal equipment and relevant devices that collect, store, transmit, exchange, and process information according to certain rules and procedures (Article 76 of the new Cybersecurity Law). If you have a couple of computers at home that can share files, and perhaps a printer connected to them, you technically have a network. The law is not likely to go that far, but the generic definitions of network and network operators leave a lot of room for interpretation, which is exactly how the Chinese government wants it.

The new Cybersecurity Law also requires critical information infrastructure operators (CIIOs) store within China personal information and important data gathered and generated within China and conduct annual security risk assessments regarding their data. Though the definition of CIIO is yet to be clarified, we already know China’s yet to be finalized Measures for Security Assessment of Personal Information and Important Data Leaving the Country will likely require foreign companies doing business in China make big changes in how they handle data. The Cyberspace Administration of China (CAC) published a draft of Measures for Security Assessment of Personal Information and Important Data Leaving the Country back in April, raising many concerns for foreign businesses operating in China.

These Measures for Security Assessment would expand the data localization requirement to all network operators. This would mean that pretty much all personal information and important data collected by network operators within the PRC must be stored within China and not leave China, other than for “genuine business need” and after a security assessment. And if you think you may be a network operator, you probably are.

Since the new Cybersecurity Law does not differentiate between internal and external networks, it is broad enough to include any company that owns an internal network. Will your China WFOE be able to transmit employee information back to its overseas headquarters? In China’s Cybersecurity Law and Employee Personal Information, we set out best practices for doing this, but that was written before publication of the Draft Measures. Should the Draft Measures become effective — as expected — our views on data transfers will almost certainly toughen. Foreign companies are already setting up data centers in China so as to be able to keep data local and many of our clients are looking at doing the same.

We have been reluctant to write much about data and privacy protection in China because existing laws are both unclear and in a massive state of flux. But because this is so important and because this reluctance cannot extend to a client who needs to know what it must do now with specific data, we plan to write more often about these topics in the weeks and months ahead.

Please stay tuned.

Editor’s Note: Sara Xia is an experienced lawyer with law degrees from Shanghai University and the University of Washington. Sara practiced law in China from 2009 to 2012 and then in 2014 she became licensed to practice law in both Washington and California. Sara recently joined Harris Bricken to assist our clients with their cyberlaw and corporate matters, mostly while working out of Seattle, Beijing and San Francisco.

Categories: Chinese IP

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