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Quick Question Friday: China Law Answers, Part XLIVI

China Law Blog - Sat, 01/20/2018 - 01:58

Because of this blog, our China lawyers get a fairly steady stream of China law questions from readers, mostly via emails but occasionally via blog comments as well. If we were to conduct research on all the questions we get asked and then comprehensively answer them, we would become overwhelmed. So what we usually do is provide a super fast general answer and, when it is easy to do so, a link or two to a blog post that may provide some additional guidance. We figure we might as well post some of these on here as well. On Fridays, like today.

Companies frequently reach out to our Chinese lawyers regarding their desire to do a China joint venture and we often find ourselves suggesting they first do more to make sure there is a sufficient meeting of the minds with the Chinese company before paying lawyers to start drafting the necessary joint venture documents. Our clients then usually ask what they need to know to gain greater certainty. We also get similar questions based on our blog posts.

There is a Chinese saying that is often applied to joint ventures is “same bed, different dreams.” This Chinese saying (同床异梦) actually far predates joint ventures — it applies to any sort of partnership without a meeting of the minds. But it most certainly makes sense for joint ventures as we far too often see Western companies and Chinese companies rush into joint ventures without ever discussing their respective dreams.

Many years ago, a client about to fly to China to meet with a potential Chinese joint venture partner asked for our help in formulating questions to ask of the Chinese company to help determine whether to enter into the joint venture deal. We provided a list of issues to raise at that meeting, and have provided a similar list (honed a bit more each time) to subsequent clients facing the same situation. The goal of raising these issues is to determine whether the two companies share the same dreams, and whether the Chinese company is JV worthy. This list includes the following questions and it is what I send clients who ask me either what they should be discussing with their putative joint venture partner or even when they ask what makes a joint venture work or fail. The below are questions to which the answers will give you a good idea regarding whether your joint venture will work.

  • Why are you seeking to form a joint venture with us and what will be the goals of the joint venture?
  • What will you do for, and with, the joint venture?
  • What exactly do you plan for your company to be doing to advance the business of the joint venture and what exactly do you expect our company will be doing to advance the business of the joint venture?
  • Who will make business decisions for the joint venture, and what will mechanisms will we use for reaching a decision?
  • What will each of us be contributing to the joint venture? For instance: property, technology, intellectual property, money, know-how, and employees. If the joint venture loses money, who will be responsible for putting more money in?
  • How will we resolve disputes? China lawyers like to include provisions saying that we will work out any issues among ourselves and if that fails, we will arbitrate. The tougher question is: how will we deal with day to day disputes in a way so that the joint venture does not collapse?
  • Can either of us use confidential JV information for our own business? Can our own businesses compete with the JV? Can our own businesses do business with the JV?
  • How and when will the joint venture end? What if one of us wants to buy the other out?

Posing these questions puts China  joint venture dreams to the test.

For more on China joint ventures, check out Joint Venture Jeopardy and Avoiding Mistakes in China Joint Ventures

Categories: Chinese IP

Why Contracts with Your China “Friends” Are So Necessary

China Law Blog - Tue, 01/16/2018 - 08:57

Your enemy won’t do you no harm, ’cause you’ll know where he’s comin’ from; don’t let the handshake and the smile fool ya. Take my advice I’m only tryin’ to school ya. Smiling faces, Smiling Faces, Sometimes they don’t tell the truth.

             Smiling Faces Sometimes, by The Undisputed Truth

Not a month goes by without some company telling one of our China lawyers how great their relationship is with their Chinese counter-party, be it the Chinese company with which they are contemplating a joint venture or the Chinese company that manufactures their widgets.

As lawyers, our thoughts upon hearing this sort of thing tend to be as follows:

1. Great. Truly great. It is always better to have a good relationship with the companies with which you do business, be that company be in China or in Peoria. I am always saying that “we can draft the world’s best contract, but if it is with a crook, it won’t be worth the paper on which it is printed.” So yes, the character of those with whom you do business does matter. A lot.

2. But to us as lawyers, that you are friends with your Chinese counter-party or that you have a great relationship is legally irrelevant. We have been trained to ask the what ifs and the what ifs here are easy-peasy (sorry, but I just wrapped up season two of Stranger Things, which BTW, is every bit as good as season one).

The what ifs here are easy for us because we deal with them pretty much every day, usually in one of the following two situations:

  • The foreign company was wrong about its Chinese counter-party and their relationship with it. Or maybe they were right but the situation changed enough so that the relationship soured.
  • The existing ownership or management structure changed and the relationship changes with it.

Either way, we as lawyers can help a company having to deal with one of the above situations if they have written documents to protect them. And if they don’t, we typically can’t help them.

Contracts are generally written when the relationship among the contracting parties is good. There are three reasons why it makes sense to have a contract with your Chinese counter-party — even if your relationship with it is great:

1.  Clarity. The first is to achieve clarity. To make sure you and the Chinese company are on the same page. For example, if you ask your Chinese supplier if it can get you your product in 20 days, it will say “yes” pretty much every time. But if you put in your contract that the product needs to ship in 20 days AND for every day it is late, the Chinese company must pay you 10% of the value of the order, there is a great chance the Chinese company will get honest with you and tell you that 20 days is impossible. At that point, you and the Chinese company can figure out what is realistic and then you know what to expect, realistically, going forward. Needless to say, I can give countless examples of this sort of thing, but this is yet another reason why we advocate putting your contract in Chinese (and not just translated). Clarity before you start the relationship. It is more important than you think and it totally makes sense no matter how good your relationship may be.

2.  Stricture The second benefit of having a contract with your Chinese counter-party is that it will likely bring that company to heel. By this I mean that just having a well written contract that is at least potentially enforceable means that the Chinese company knows exactly what it must do to comply. And, in most cases, it might as well. Let’s use the 20 day example as the example here as well. If your Chinese manufacturer makes widgets for 25 foreign companies and 5 of those have very clear time deadlines with a very clear liquidated damages provision, and the Chinese company starts falling behind on production, to which companies will the Chinese manufacturer give production priority? Of course it will put the five companies with a good contract at the front of the line and that is relevant even if you have a good relationship. Or are you willing to go to the back of the line because your Chinese counter-party believes you are the safe one to delay because of your good relationship?

3.  Enforceability. You may at some point need to sue your “friend” and if you do it will help to have a China contract that works. And for those who do not  believe China is good with contracts, note that the World Bank ranks China 5th (yes 5) among 183  countries in terms of enforcing contracts.

 

Categories: Chinese IP

Five Red Flags for China Employer Rules and Regulations

China Law Blog - Sun, 01/14/2018 - 10:32
Five China Employment Document Red Flags

If you have employees in China, you need written Rules and Regulations to govern the terms of your employment relationships. Since China is not an employment at will jurisdiction, well-crafted Rules and Regulations are critical to giving you a basis for disciplining or terminating an employee. And unenforceable or unworkable Rules and Regulations expose you to regulatory, liability and lawsuit risks.

Though we audit our client’s employment documents year-round, the beginning of each year always brings on an onslaught of such work, as doing so seems to be (and should be) part of every company’s New Year’s resolutions. The following are red flags, that tell you (loud and clear) that you need to revise your Rules and Regulations to avoid future trouble.

1. Your Rules and Regulations are in English only. This is by far the one our China employment lawyers see most often and this is a dead tell that whoever drafted your Rules and Regulations was not familiar with Chinese employment laws. Nine out of ten times, this also means that your Rules and Regulations came from overseas and have no real relationship with China’s employment laws. If you don’t have your Rules and Regulations in Chinese, you essentially don’t have Rules and Regulations. Oh, and just translating your English language documents is not going to cut it. You need bilingual China-centric policies written not just for China, but for your industry and your locality.

2. Your Rules and Regulations are in Chinese only. From time to time, our China employment lawyers are called (usually urgently) to assist a foreign employer whose Rules and Regulations are in Chinese only. The problem here is that none of the key HR personnel understand a word of what the Rules and Regulations say and yet they are expected to make important personnel decisions based on them. The other problem is that these China-only Rules and Regulations are nearly always inadequate. In an ideal world, your Rules and Regulations are clearly written in both Chinese and in English.

3. Your documents haven’t been updated for years. China laws change at light speed and China’s employment laws change even faster than that. The fact that employment laws are incredibly local only increases the odds that your Rules and Regulations are no longer good. You could be exposed to huge risks if you make an employment change (discipline, wage reduction or termination especially) based on Rules and Regulations that have become contrary to law. Also, what made sense for your business years ago may no longer make sense now. For example, if you started your business five full-time employees in one city but now half your 50 person workforce is part-time employees in three different cities, you need new Rules and Regulations. Like right now.

4. Your key employment documents are all over the place, both in what they say and where they are located. You cannot believe how common this one is; we see this maybe 75 percent of the time. I recently did an employment audit for a client where three different people from three different cities gave me three different sets of employment documents and nobody knew which were current nor which employees had been given which. The only solution: start all over with yet another set of documents and make sure every single employee signs on for this new one.

5. You lack signed acknowledgments from your employees confirming receipt of your employment documents. This is much worse than most realize. You need to make sure your employees actually receive a copy of your Rules and Regulations and you have proof that they did so. If you end up having an employee dispute, the employee will virtually always claim never to have received a copy of your employer Rules and Regulations. Without a Chinese language acknowledgment of receipt signed by your employees proving they received your Rules and Regulations, you will have a difficult time justifying your employment decision in front of the arbitrator/judge.

If you see yourself in the above, get cracking.

 

 

 

Categories: Chinese IP

Why Changing China Suppliers Can Be So Risky

China Law Blog - Sat, 01/13/2018 - 05:58

Smart Chinese manufacturers know that with their costs rising, they need to be able to distinguish themselves from their peers. One of the ways they are choosing to do this (even more frequently than in the past) is by copying and selling products they are making for their foreign customers. See Your China Factory as your Toughest Competitor. 

 I estimate that in the past year the number of these matters our China lawyers are seeing is about double from the previous year. Just this month, I have been dealing with three such matters myself and one of the things I always tell clients in these situations is to not let the supplier know that we are on to what it is doing because switching to a new supplier without a lot of advance planning can be very dangerous.

Why is this so dangerous? Because bad things nearly always happen when Chinese manufacturers discover their American/European/Australian product buyers will soon be ceasing to buy from them. For this reason, we instruct our clients to line up their new suppliers and have them ready to go, before even hinting that they might be having a problem with their Chinese manufacturer that may lead them to seek out another supplier. We are giving this same advice to companies that come to us wanting to switch suppliers after having learned that their existing supplier is copying and selling their products.

We give this advice because over the years our China lawyers have repeatedly seen the following:

  • Western company tells its China manufacturer it will be ceasing to use China manufacturer for its production. China manufacturer then keeps all of the Western company’s tooling and molds, claiming to own them. The way to prevent this is to get an agreement from your Chinese manufacturer that you own the tooling and molds before your Chinese manufacturer has any inkling that you will be moving on. For more on the importance of mold agreements, check out How Not To Lose Your Molds In China and Want Your China-Based Molds? You’re Probably Too Late For That.
  • Western company tells its China manufacturer that it will be ceasing to use China manufacturer for its production. Western company then learns that someone in China has registered the Western company’s brand names as trademarks in China. Western company is convinced that its China manufacturer is the one that did these registrations, but has no solid evidence to prove this. Western company is now facing not being able to have its product — at least with its own brand name — manufactured in China. See 8 Reasons to Register Your Trademark in China.
  • Western company tells its China manufacturer it will be ceasing to use China manufacturer for its production. A few weeks later, Western company has its products seized at the China border for violating someone’s trademark. The Western company is (rightly) convinced that its China manufacturer is the one behind the product seizure, believing the Chinese manufacturer registered the Western company’s brand names as trademarks in China long ago and is just now using that trademark to seize product as revenge. China has laws forbidding its manufacturers from registering the trademarks of those for whom it manufactures, but because it is usually not possible to prove that your manufacturer in Shenzhen had a cousin in Xi’an do the registering, this sort of thing goes on unchecked. This sort of thing is increasingly happening with design patents as well. For how to prevent this from happening to you, check out the following:
  • Western company tells its China manufacturer it will be ceasing to use China manufacturer for its production. China manufacturer then says it will not be shipping any more product because Western company is late on payments and owes X hundreds of thousands of dollars. China manufacturer then reports Western manufacturer to Sinosure and Sinosure then ceases to insure product sales to this Western company, which can have the effect of convincing Chinese manufacturers not to sell to the Western company without getting 100% payment upfront. For more on Sinosure’s role regarding China exports, check out China Sinosure: What You Need to Know.

So yes, switching your China manufacturer can be risky, at least when done without sufficient planning.

Categories: Chinese IP

Reason Number 465,875 Why You Need a China Manufacturing Contract

China Law Blog - Thu, 01/11/2018 - 05:58
There’s nothing we can do.

I had no idea what I was going to write about this morning, but thanks to one of our China lawyers updating me regarding the following email exchange, I have a ready-made post.

The email exchange started with the following email (modified to hide any identifiers) from a U.S. company having problems with its China manufacturer:

What do you suggest when a supplier is holding products hostage on a PO to try to get us to place larger future orders at inflated prices.

Our China attorney responded as follows:

That you are writing us (and not your regular attorney) makes me think you have almost no grounds on which to stand. I say this because 99.99 percent of the time this is true of those who write us with manufacturing problems. You are probably too late to remedy this problem with this manufacturer because the only good fix of which I am aware is a manufacturing contract (in Chinese, sealed by your Chinese manufacturer, and with a China court jurisdiction provision) that explicitly prevents this. POs are pretty worthless. Unless you have a contract (in Chinese) that clearly lists out this and that, there is probably little to nothing you can do. See China Contracts that Work. A good China manufacturing contract should also contain a liquidated damages provision, a mold protection provision (so that the factory does not keep your molds if there is a dispute, see Product Molds And Tooling In China: Three Things You Must Do to Hang on to Yours), be properly chopped/sealed (see Signing And Chopping A China Contract. It’s Complicated). It is also critical that your contract is with the right Chinese company as Chinese companies are notorious for signing agreements with an essentially empty shell company, usually based in Hong Kong. And as you have learned here, it also must include pricing and product delivery provisions.

If someone were to contact us with all (or at least most) of the above in line, we would be happy to assist them in dealing with their China manufacturer. But — and here is the kicker — nobody ever has, and there are three simple reasons for that. One, if they had a contract that contained all of these things they likely would never have had the problem in the first place. Two, if they had a contract that contained all of these things and they did have a problem, they would be in a position of sufficient power that they probably could get their Chinese manufacturer to capitulate without the need for an attorney. And three, if they had a contract that contained all of these things, they would simply go back to the lawyer that drafted it (and not to a new lawyer) for assistance.

There is typically an even bigger issue that we always point out when someone comes to us with a manufacturing problem like the above. Whenever someone has any problem with their manufacturer, one of the first questions we ask them is whether they have registered their trade names and logos as China trademarks. We ask this because many times (like well over half) when foreign companies start having problems with their Chinese manufacturer, their Chinese manufacturer has already gone off (using an apparently unrelated third party) and registered the trade names and the logos of the Western company with which it created the dispute. Chinese manufacturers do this to gain leverage and this really works because your Chinese manufacturer can use “your” trademarks to stop you from having your products manufactured in China or shipped out of China with your own brands and logos on them. See When to Register your China Trademark. Ask Tesla and China: Do Just One Thing, Trademarks. Or, as is usually the case, it will use “your” brand name and logo to sell your products in countries where you do not have trademark protection. So if you have not already registered your brand names and logos in China, you should do this IMMEDIATELY (you very well could already be too late) and you should do so before you complain any more to anyone there. And you also should register your brand names and logos in whatever countries in which you sell (or will sell) your products as well.

China manufacturing protection is possible, but just sending out POs and thinking you have it is just wrong. Sorry.

 

Categories: Chinese IP

China Trademarks: 12 Resolutions for 2018 (Part One of Two)

China Law Blog - Mon, 01/08/2018 - 05:58

In the spirit of starting out 2018 on the right foot, I have compiled a list of 12 trademark-related resolutions for any company that does business in China and has at least one brand that they care about.

To the resolutions!

1. Register the trademarks you are using in China for the products/services you are using. This is as close to a no-brainer as there is in China IP. But nearly every week we hear from folks who have discovered that someone else registered their trademark in China, so here goes: China is a first-to-file jurisdiction for trademarks and does not have robust enforcement against trademark squatters. A foreign trademark registration has no relevance in China, because every country has its own trademark system. And no matter how well-known you may think your trademark is, it’s not well-known enough in China to gain protection without registration. The bottom line is that if you don’t register your own trademark, someone else will do it for you – and then you’ll be faced with the unpleasant choice of either paying them off or selecting a new brand name for China. Think of it this way: if you lived on the San Andreas Fault and earthquake insurance was really cheap, wouldn’t you buy insurance?

2. Register your trademarks in additional classes/subclasses. For better or worse, trademark protection in China is limited to the subclass(es) in which a given trademark is registered. With a few minor exceptions, if you have a trademark for a single good in a given subclass, that registration will also cover ALL other goods in that subclass, but no other goods in any other subclass. And because China does not have an affirmative use requirement, it is possible to register your trademark to cover goods and services beyond those you are actually using in China. It could be for goods/services that you hope to use in China one day, or it could be for goods/services you simply don’t want anyone else to use in China using your name. Most companies conduct a cost-benefit analysis and select a few high-priority classes in which they would like protection. If you make swimwear, you probably don’t care too much about someone selling motor oil or microscopes using your brand name. But if you’re a company with deep pockets and/or a deep-seated aversion to seeing someone else use your logo, think about the Starbucks approach: register your trademark in all 45 classes and all of the related subclasses.

3. Register more trademarks than you are currently using. The logic here is similar to the previous resolution. China doesn’t require proof of use to register (or maintain) a trademark, so you can register trademarks that you have never used in any classes (and may never use). These could be marks that you hope to use in China one day, or they could be marks that you simply don’t want anyone else to use in China. Usually the latter category includes trademarks that the China Trademark Office (CTMO) would not deem to conflict with yours, but that you would consider objectionable.

4. Monitor your trademarks. The CTMO is not the most communicative bureaucracy. Absent a challenge (e.g,, based on use or validity) to your trademark, after registration you won’t hear from them for another 10 years, and that’s assuming you renew the mark. You won’t hear from them if a third party tries to register a mark that is similar to yours and in the same subclass(es). You also won’t hear from them if a third party tries to register the exact same mark that you have registered in the U.S. In either case you may have grounds for a successful opposition, but it will depend on the identity of the third party. (Your best shot is if the applicant is a current or former business partner.) But the window of opposition is relatively short – three months from the date of publication – and it’s hard to oppose a trademark you don’t hear about until too late. You can also attempt to invalidate a mark after registration, but at that point you’re fighting a rearguard action against a mark that will be valid unless and until you succeed in invalidating it. The best solution, of course, is to file applications yourself before third parties can do so. But failing that, regularly monitor the CTMO database and the Trademark Gazette for potential conflicts.

5. File non-use cancellations against squatters. Has “your” mark has been registered by a trademark squatter in China? Some squatters have no intention of ever using their registered trademarks in commerce; their sole goal is to sell the mark to the highest bidder. The good news is that three years after registration, all trademarks are vulnerable to cancellation for non-use. If you have the patience to wait three years (or only recently found out about the existence of such a mark), this could be a great option. As an initial step, you should conduct a thorough Internet search to see if the mark is being used. It’s not foolproof, but given the preeminence of e-commerce in China, if someone is legitimately using a mark in China, the Internet will contain signs of such use. If the search comes back clean, file a non-use cancellation against the squatter and also file a new trademark application of your own. (Cancelling a trademark does not transfer ownership of the cancelled mark; it just renders the mark invalid.)

6. Come up with a Chinese name for your mark and register it. If you care about your brand in China, it’s not enough just to register the English-language version. You also need to protect your Chinese brand – even if you don’t even have one yet. The minute your English-language brand gets attention in China, it will be given a Chinese name by the local media and consumers. Without exception. And the minute that happens, someone will register the Chinese name as a trademark, and you’ll have forfeited not only the right to use your Chinese brand name, but the ability to choose it in the first place. This story has played out a number of times throughout the years, with companies from Pfizer to Hermes to Penfolds.

But knowing that you need a Chinese name is different from actually selecting one. As I wrote just a few months ago:

Picking a Chinese name is tricky, and simply being fluent in Chinese does not make someone an expert in Chinese-language branding any more than being fluent in English makes a random American an expert in English-language branding. Far too often we see companies delegate this important decision to their “guy in China,” with predictably middling results. Yes, it’s better than having a non-native speaker pick the Chinese brand name by using Google Translate, but that’s not saying much. We work with several branding companies that specialize in this work.

In the conclusion of this two-part post, I’ll present six more resolutions. Happy new year, everyone!

Categories: Chinese IP

Quick Question Friday: China Law Answers, Part XLV

China Law Blog - Fri, 12/29/2017 - 10:51

Because of this blog, our China lawyers get a fairly steady stream of China law questions from readers, mostly via emails but occasionally via blog comments as well. If we were to conduct research on all the questions we get asked and then comprehensively answer them, we would become overwhelmed. So what we usually do is provide a super fast general answer and, when it is easy to do so, a link or two to a blog post that may provide some additional guidance. We figure we might as well post some of these on here as well. On Fridays, like today.

Occasionally a client will be in such a mad rush to file a trademark that they haven’t even formed the company that will own the trademark. Usually, they have a good reason for being in a rush: they’ve antagonized or otherwise alerted a potential trademark squatter, and the longer they wait, the greater the chance that a third party will apply for “their” trademark. They then ask us: if they know what the name of their company will be, can they still file a trademark application in China?

The short answer is no. Without proof of a trademark applicant’s legal existence (e.g., a passport for an individual or a Certificate of Good Standing for a company), you cannot file a national application with the Chinese Trademark Office. This requirement is not actually that onerous; a screenshot from the Secretary of State’s website is generally sufficient evidence of a company’s existence. But it does mean that you can’t file a trademark application in China immediately after forming your company; you need to wait until the relevant website is updated, which usually takes at least a couple days.

Occasionally, during those couple days, the client learns that the supposed name of their company isn’t actually available after all. And then they’re happy that they had to wait. But mostly, they just wish they had formed their company earlier.

Categories: Chinese IP

Beijing Employee Terminations and The Good Faith Principle

China Law Blog - Fri, 12/22/2017 - 13:44
Rules and Regulations are the key to China employee terminations

As I have previously written, one of the best grounds for unilaterally terminating a China employee without having to pay statutory severance is for a serious breach of employer rules and regulations.

The basic rule is that if you as an employer do not have specific provisions in your rules and regulations that will justify the termination, you may have no recourse against an employee, no matter how terrible your employee’s conduct. Shanghai courts, however, generally dislike employees who act in bad faith and for that reason, a Shanghai-based employer may still be able to terminate an employee who has acted in bad faith so long as the employer rules and regulations give them reasonable grounds for doing so. If you regularly follow my China employment law blog posts, you know Beijing and Shanghai do not usually see eye to eye on most employment law issues. The recent (decided just last month) Alibaba employee case I write about below indicates Beijing is inching closer to Shanghai in putting more emphasis on the employee’s duty of good faith.

The employee was hired by Alibaba to work as a senior manager in Beijing beginning January 28, 2013, under a fixed-term employment contract without a probation period. On April 19, 2013, the employee notified Alibaba via email that he had to take a 2-week sick leave to treat his neck pain and Alibaba approved. Specifically, the employee told Alibaba he suffered from a severe headache and then after a doctor’s appointment, he learned he had serious neck problems and would need two weeks of full rest and he might need hospitalization for more treatment after his follow-up appointment after the Labor Day holiday. The employee later produced a doctor’s note issued on April 18 that essentially confirmed the above. The employee then went to Brazil on April 19, 2013 and returned on May 4, 2013. On April 25, 2013, Alibaba first tried to terminate the employee by citing the employee’s  failure to satisfy the conditions of his employment during the probation period, but it then withdrew that notice. Alibaba then issued a notice of immediate termination to the employee on May 16, 2013, citing a serious breach of employer rules and regulations based on the employee having deceived his employer and having provided false information to go on a leave. Alibaba seemed to believe that if the employee’s neck problems were so bad, he could not and should not have gone to Brazil. The employee disagreed, claiming his trip to Brazil was not for pleasure and contending it was none of the employer’s business where he was while on an approved sick leave.

The employee brought a claim against Alibaba for unlawful termination and demanded the reinstatement of his old job. The employee won at trial and then again on appeal. The primary basis for Alibaba’s losing was because there was nothing in the employer rules and regulations restricting where an employee must be during sick leave and no such mandate in any Chinese law, there could be no statutory basis for the unilateral termination. Finally, at a re-trial before Beijing High People’s Court, the employee lost, somewhat unexpectedly. The Beijing High People’s Court stated that although it was true employers should have reasonably specific rules and regulations, it would be impractical to require the rules and regulations to cover every single detail regarding an employee’s daily activities and when the document was silent on a specific situation, the basic principle in the civil code should apply and the employee can be expected to follow the principle of good faith, which was the foundation of every employment relationship. It ruled that even though the employer rules and regulations did not specify where employees must take their sick leave, the employee’s behavior during the leave must be consistent with the reasons for taking the leave. It went on to say that based on “common sense,” Alibaba had every right to question the purpose of the employee’s leave request and the employee’s refusal to come forward with the truth when questioned by Alibaba meant he violated the principle of good faith, causing significant bad consequences to Alibaba by disrupting its work order and business operation. Alibaba was therefore justified in terminating the employee for his serious breach of the employer rules and regulations.

Please do not read too much into this case. Note the employer was Alibaba, not some WFOE. Also, think about the time and money and not so good publicity Alibaba got for taking this case through all these proceedings. And is it really reasonable to believe this one employee disrupted Alibaba’s business operations by taking a two week trip to Brazil? Go with mutual termination if you feel you must terminate an employee or maybe just give them a second chance.

Bottom Line:, This may be the beginning of a trend (but it probably isn’t), but the bottom line is still the same: if you don’t have  well-crafted rules and regulations, you will still find it nearly impossible to terminate a problem employee, in Beijing and pretty much everywhere else in China.

 

Categories: Chinese IP

How to Save on Your China Legal Fees, or Not

China Law Blog - Tue, 12/19/2017 - 06:33

How to save on your China legal fees, or not.

Everyone wants to save a buck or two. I totally get that.

But to stick with the clichés (but throw in a new currency), there is also such a thing as being penny-wise and pound foolish. To put it bluntly, trying to save money on your China legal fees is usually not the right call.

One of the things I do at the end of each year is to check in on companies that chose not to retain my law firm for various reasons during the year. Sometimes it is because they went with a friend. Sometimes it is because they went with a local lawyer not steeped in China. Sometimes it is because they chose to do it themselves. Almost invariably it is because they chose not to spend the money and almost invariably, I hear back from them that they wish they had (oftentimes putting the blame on someone else in the company for stopping them).

I am right now dealing with a different issue. A really good friend of a really good friend who claims not to have the money to do things completely on the up and up in China keeps asking me for advice on how he can do things on the cheap there. I hear from my really good friend that his good friend is “really messing up” in China but doesn’t know it and yet the very last thing I want to do is to tell this person that. Really, the only thing I want to do is not to have to tell him anything.

A few weeks ago though I got an email from him that said the following (I’ve changed it quite a bit so that even he will not be able to recognize it):

Everything is going great with the WOFE and I’ve been following the advice on your blog throughout the whole process. We made sure to get the company scope right. I also bought Grace’s China Employment Law book which I LOVE. It has helped me immeasurably. What would you recommend to someone who needs to draft a good employee handbook (or as Grace calls it, Rules and Regulations) but can’t afford a top-tier law firm like Harris Bricken? I know from the blog that templates are a no-no, so what’s a cash-strapped start-up to do?

The below is the email I wanted to write, but didn’t:

I just hope you are right about your scope, but I doubt that you are. Scope problems with WFOEs rarely show up quickly and that is what makes them so insidious. You go to a second-rate WFOE formation company whose goal is to get you into a brand spanking new WFOE as quickly and cheaply as possible and you think that should be your goal as well. One of the easiest ways to get a WFOE quickly and cheaply is to give it a narrow scope. This helps ensure a successful WFOE formation but will that WFOE’s scope be broad enough so that your WFOE operate legally not just now but years from now? When our China lawyers work on a WFOE formation we always drill down to determine what our clients want to do now and 3-5 years from now and we draft accordingly, even though this can slow down the WFOE formation process. We are just not willing to hand our clients a  WFOE with a one-year shelf life.

As for an employee handbook, you have read Grace’s book and so you know how critical it is that these be well-crafted in both Chinese and in English. I know of no law firm with a specialized China employment lawyer who is truly bilingual Chinese and English who doesn’t charge what you would call “top-tier law firm” prices.

Instead, I mumbled a few platitudes and wished him well, knowing that this is a person who is likely to fall off a cliff no matter what I do.

I also got an email from the son of a personal friend who is looking to buy a really high-risk product from Chinese manufacturers (think fireworks, but it’s not fireworks):. His email (changed so as to make it so nobody can identify it), is as follows:

I have done more digging into sourcing fireworks from China and I am heeding your advice on the risks and I have recently talked with other lawyers and a couple insurance brokers regarding my situation. They are recommending that I find a way to partner with the Chinese manufacturers and act as their North American distributor and that I seek protection under the Chinese company’s insurance. Do you have any recommendations regarding the type of paperwork I would need to hold the factory accountable for potentially defective products?

My response was to suggest that this may not necessarily be a good way to go, but below is the response I wanted to send:

Are you kidding me? Who the heck are these people giving you this advice because they obviously do not know insurance, China, or US product liability laws? Just because you are the distributor of a product made by someone else does not in any way let you off the hook if the products you are distributing are defective. This is especially true if you are getting your products from China. I am constantly consulting with such distributors and their insurance companies on this very issue after they have been sued.

Getting insurance from Chinese companies is almost always a waste of time and, honestly, whoever suggested otherwise to you almost certainly does not understand China. Here’s our explanation on this. I’d do the opposite and set myself up so that I’m as close to judgment-proof as possible.

In the old days, we used to refer people like these to Chinese law firms but now the good Chinese law firms charge pretty much the same as the good American and British law firms and we are not in the business of handing anyone over to someone in whom we ourselves do not believe.

Just not sure what to do with these sorts of requests beyond mouthing platitudes and then writing on here….

Categories: Chinese IP

China to Movie Theaters: We’ll Pay You to Show More Chinese Films

China Law Blog - Sun, 12/17/2017 - 05:58

Last week, the Chinese film bureau announced a new domestic film incentive program. The exact details of the program have yet to be spelled out, but the gist is that starting January 1, 2018, Chinese movie theaters will receive financial rewards for showing more Chinese films. The rewards are based on a theater’s total box office receipts for the year and kick in if at least 55% of those receipts are for domestic films. Even bigger rewards kick in if the percentages exceed 60% and 66%, respectively. Theaters must submit box office information through the government’s internal system and cannot engage in box office fraud (duh).

The 55% mark may be difficult to attain. As of a few weeks ago, Chinese films had a market share of 52.4% for 2017, and that’s largely because of the enormous revenues from Wolf Warrior 2, the highest-grossing film in China’s history. During the first 6 months of the year (Wolf Warrior 2 opened on July 27), Chinese films had a market share of only 39%.

Many jurisdictions have film incentives, but most are geared toward film production, based on the theory that film productions inject money into the local economy, provide local employment, and develop local expertise (thereby making the jurisdiction even more attractive for future productions). British Columbia is the canonical success story for production incentives, but many US states have also pursued this strategy, as have numerous countries in Europe and beyond. Similarly, almost every country, from the US to Europe to China, offers grants, tax breaks, and other incentives to local filmmakers.

Tying an incentive program to consumption sends a very different message. Measuring the percentage of box office revenue is a zero-sum game; if Chinese films have a higher percentage, that means foreign films (most of which are American) have a lower percentage.

Whether this deal will cause movie theaters to book more Chinese films will largely depend on the specifics of the incentives. All things being equal, this incentive should spur movie theaters to book a Chinese film rather than a foreign film. But when are all things equal? Chinese movie theater owners act in their own economic best interests. Even if they would rather show Chinese films (and I’m sure most of them would), they are in the business of filling seats, and if showing Chinese movies results in lower attendance, the incentives will need to be both enticing and attainable.

This isn’t the first time China has announced an incentive program for increasing the market share of Chinese films. A similar program was announced last March, but the incentive only kicked in for theaters that derived at least 66% of their box office receipts from domestic films. I don’t think the Chinese government reduced the target because they were feeling generous. They wanted results, and they weren’t getting them at 66%.

The knock on Chinese movies of late (at least, until Wolf Warrior 2 single-handedly changed the narrative) was that they hadn’t been good enough to draw audiences. Quality is subjective, but it’s hard to look at the China box office success of films like Warcraft, Resident Evil: The Final Chapter, and Pirates of the Caribbean: Dead Men Tell No Tales and conclude that Chinese audiences have inordinately high standards. Perhaps that’s exactly the point. If foreign movies like these can dominate the Chinese box office, where does that leave Chinese mediocrities?

This incentive program makes the implicit assumption that Chinese movie theaters can affect what Chinese moviegoers decide to see. Otherwise, why reward them? I have my doubts this is true, but if it is, the work of Nobel-prize winning psychologist Daniel Kahneman suggests the Chinese government is going about this all wrong. They should give the incentive to all theaters, and only demand repayment if theaters show too many foreign films. It’s exactly the same economic proposition. But instituting an explicit bias against foreign films has bad optics, and the Chinese government is still negotiating with the MPAA.

No matter what comes out of those negotiations, the bottom line is clear: the Chinese government wants fewer foreign films in its marketplace, not more. Hollywood studios’ involvement in domestic productions may soon shift from a backup plan to the main event.

Categories: Chinese IP

China Manufacturing: The Preliminary Questions We Ask

China Law Blog - Fri, 12/15/2017 - 06:02
China Manufacturing Agreement Questions

Our China lawyers are always working on some China manufacturing matter or another. Those matters typically involve what I internally call the manufacturing trifecta: China NNN Agreement, China Manufacturing Agreement, and China Trademark.

For each of these matters (and for just about anything we do), the first thing we try to do is to get a general sense of the client and the project. We typically achieve this by starting out with a broad set of questions that are loosely tailored to the client and the client’s project, with very few assumptions by us.

Once we receive and analyze the client’s answers to our broad questions, we then come back with a set of hyper-focused questions, the answers to which should allow us to start drafting the contract or filing the trademark. The below is a slightly revised email that went out this week to a client regarding its China Manufacturing Agreement. I am running it here because it nicely highlights some of the basic issues that go into manufacturing in China and, correspondingly, some of the basic issues that go into drafting a China Manufacturing Agreement.

To get started, please provide the following basic information:

Please provide a basic statement in reasonable detail regarding your plan for your manufacturing project in China. This statement should include at least the following: a. What is the product or products? How will you provide specifications for this product or products? I note that your company sells a large number of products. Which of these, in general terms, will be made in China? b. Who will be manufacturing this product or products? What is the current status of your relations with your Chinese manufacturers? c. What quantities per year will you be buying of this product or products? d. Will you be using one factory or several factories? e. Do you design the product or products, or do you brand Chinese designed product, or do you do both? f. Who is responsible for production design? Who will own the result of that design process? g. How do you plan to monitor the manufacturing process? h. What entities will be the retail customers for the product or products? Will you sell a) to distributors, b) to retailers, c) direct to the public? Or some combination of these? i. What are the pricing and payment and shipment terms? j. How do you deal with basic business terms: price, quantity, delivery dates and similar? k. What registered IP do you have that is embodied in the product or products? Where is such IP registered? IP means patents, trademarks, copyrights, and trade secrets. l. Do you make use of molds, jigs or other tooling in the manufacturing process? If yes, what is your current procedure for dealing with such items? m. What are your specific business concerns related to manufacturing in China? After I get your responses to these questions, I will then provide you with a more focused set of questions.
Categories: Chinese IP

Hiring China Employees DURING WFOE Formation

China Law Blog - Wed, 12/13/2017 - 05:58
Be safe. Hire after your China WFOE has been formed.

If you are a foreign (i.e., non-Chinese) entity with no legal presence in China, you cannot directly hire any employees in China. The basic rule is that you cannot hire a Chinese individual until after you have formed an entity (e.g., a WFOE) there and violating this rule can (and nearly always does) bring all sorts of bad things down on everyone involved. See Doing Business in China with Deportation or Worse Hanging Over Your Head.

What though do you do if you are in the process of forming your WFOE in  China? Can you bring on employees during that time to assist with setup and other such things? Surely during this usually three to five month period, it is okay to bring on people and pay them as “employees” and then “convert” them over to legal status employees as soon as the WFOE is formed, Unfortunately, this is technically not allowed; there is no way for a foreign entity to hire a Chinese national “directly” unless and until it has an entity (a WFOE or a Joint Venture) in China. Sending illegal payments to your Chinese “employees” is not “hiring directly;” that is engaging in illegal activity before the WFOE is formed, and it is generally not a good way to start.

Though there is absolutely nothing in Chinese law that allows for “hiring” an “employee” before a WFOE is formed, the truth is that none of our Chinese lawyers have heard of anyone getting in trouble for this so long as they were able to conclusively show they were making every effort to form their WFOE as quickly as possible. On multiple occasions we have had clients caught for this and each time we prepared a binder for the Chinese government authorities showing that our client was doing all it could to form a WFOE as quickly as possible and each time the Chinese government authorities simply told our client to move forward on the WFOE formation as quickly as they could. In every instance, the Chinese government authorities checked back regularly regarding the progress of the WFOE formation. You must realize that for tax collection reasons the Chinese government is on a constant lookout for foreigners doing business in China without a WFOE and they have become exceedingly good at finding them.

This is not to say though that bringing on workers during the formation phase of your WFOE is not without risks. First off, past performance is no guarantee of future performance. Second, everything in China is somewhat local and that is particularly true of anything related to employment. See China Employment Law: Local and Not So Simple. In other words, what works in Shenzhen may not work in Shanghai, and vice-versa.

The biggest risk of bringing on workers during the formation phase of your WFOE probably comes from the workers themselves. If things go well with them, no problem. But things very often do not go well with Chinese “employees.” Here is an all too common situation: a foreign company hires a Chinese person to work on the ground before the WFOE comes into existence. This Chinese person does something illegal in China and the foreign company informs the Chinese person that he is fired.  The Chinese person then says: “you cannot fire me because my engagement was illegal and that means you are operating illegally in China and everything I did that you say was illegal was done for the company and so you (the company) were doing illegal things too. I know more about these things because I am the one who was doing them but if I report them I won’t get in trouble for them, you will.

If the foreign company terminates the employee that individual will no doubt files a lawsuit for unlawful termination AND report the foreign company to the Chinese government and then the WFOE and its management get in trouble, in addition to having to take the employee back because the termination was unlawful. The best resolution at this point is virtually always to reach a settlement with the “employee,” but because the “employee” has so much leverage in this sort of situation, the company usually has to pay quite a lot of money to extricate itself from the rogue “employee.”

Even after the WFOE is formed the new WFOE is at some risk of one of its pre-WFOE “employees” ratting it out for the pre-WFOE hiring, but that is much rarer. To ameliorate this risk we always advise that you give your employees seniority and full other credit for any time spent working for your company during its pre-WFOE days.

Bottom line: Not bringing on Chinese employees while in the process of forming your China WFOE can be inconvenient, but it is always the safest route.

 

 

 

 

 

Categories: Chinese IP

What Does the Chinese Film Industry Get From Hollywood?

China Law Blog - Mon, 12/11/2017 - 05:58

Chinese film director Zhang Yimou has made some of my favorite Chinese-language films: Raise the Red Lantern, The Story of Qiu Ju, House of Flying Daggers, Hero, and more. He also produced the spectacular Opening Ceremony of the 2008 Olympics in Beijing, for which he is justly revered in China. Despite some recent missteps (The Flowers of War, The Great Wall) his credibility as an artist and Chinese cultural icon is nigh-unassailable.

Last week Zhang published an opinion piece in The New York Times titled “What Hollywood Looks Like From China” I’m not sure what to make of it. The piece contains some lovely metaphors and a call at the end for mutual cultural understanding. But the middle section, ostensibly a summary of the relationship between the Chinese and American film industries, reads like the opening statement in a trade negotiation: “But at the moment, a large discrepancy exists in that very few Chinese movies are able to enter the American market and attract a significant audience. Chinese audiences provide Hollywood with huge profits, but what does China’s film industry gain in return?”

The language is slightly ambiguous (by intention, I assume), but a fair inference is that the playing field isn’t fair, and it’s specifically unfair to Chinese films because American movies dominate the Chinese market and rake in the cash, but Chinese movies are prevented from gaining a foothold in the U.S. market.

Reading this sort of thing, I’m sure, makes Hollywood’s blood boil. For years, China has systematically and formally constrained the ability of foreign movies to enter the Chinese film market through a quota system and periodic blackouts on non-Chinese films. The films allowed in under the quota system receive only 25% of the net profits, and even those numbers are aspirational, as the box-office numbers are woefully underreported and payments are sometimes months or years late. An additional number of foreign films are allowed in as buyouts, which except in limited situations (e.g., Resident Evil) do not involve any revenue sharing. The number of buyout films has been increasing and is expected to hit an all-time high of 70 films this year. Long story short, even when US films do well in China (and they often do) most of the revenue stays in China with the Chinese distributors and exhibitors.

Meanwhile, Chinese films have essentially unfettered access to the US market. All it takes is a willing distributor, which could be a Chinese-owned distributor like China Lion. When you add streaming to the mix, it is theoretically possible for every single Chinese movie to be released in America and the Chinese filmmakers can receive whatever sort of profit-sharing arrangement they can negotiate.

And we haven’t even talked about content restrictions: China regularly censors content, whether it be lopping off several minutes (Logan), agreeing to show a movie then pulling it in the middle of its first showing (Django Unchained), or declining to show a movie altogether (Ghostbusters). By contrast, Chinese films are generally shown uncut in the US absent a specific agreement between the filmmaker and the distributor.

Zhang is absolutely correct about the box office disparity, though. Despite the restrictions in China, American movies still do huge business there – although Chinese movies continue to gain strength and popularity. And notwithstanding the openness of the US market, Chinese films continually fail to gain any traction in the U.S. market.

But so what? People watch what they want to watch. It’s not as if films from other countries do any better in the US. The list of top-grossing foreign-language films in the US since 1980 is dismal reading if you’re a foreign filmmaker: Crouching Tiger, Hidden Dragon is in the lead with $128M, but the next film after that (Life is Beautiful) only made $57M, and by the time you get to #11 the grosses are down to $20M. The market for foreign films in the US remains small and largely limited to two demographics: diaspora-driven audiences and arthouse audiences. Otherwise, Americans don’t want to watch movies with subtitles and won’t accept dubbed films. And although Crouching Tiger’s phenomenal success cannot be ignored, it is extremely hard to see it as anything but a once-in-a-lifetime event. Zhang Yimou should know this better than anyone; his films Hero (#3 all-time foreign film with $53.7M) and House of Flying Daggers (#26 all-time with $11M) benefited from the post-Crouching Tiger box office swell for Chinese films that ended nearly as quickly as it started.

It’s perfectly understandable for a country to support and protect its own filmmakers and retain its own cultural identity. If I had grown up in another country, I’m sure I would have mixed feelings about America’s cultural dominance. But justifying China’s protectionist measures by comparing relative box office percentages is an argument of false equivalents. Let’s not forget that foreign companies are prohibited from distributing films in China, and can only produce movies in China if they have a Chinese partner. Meanwhile, China’s Dalian Wanda Group, through its ownership of AMC Theatres, is the largest film exhibitor in the United States.

It’s reasonable to ask what the Chinese film industry gets from Hollywood. But it’s also reasonable to ask what the Chinese film industry should get. Many would argue that China is already getting more than its fair share. But as Zhang’s piece makes clear, that’s not how China sees it. Backup plans, anyone?

Categories: Chinese IP

Owe Money to China? Meet Sinosure, Leviton Law Firm, and Brown & Joseph

China Law Blog - Sun, 12/10/2017 - 06:59
Sinosure wants you

Sinosure and its US collection companies and law firms (mostly through Brown & Joseph and the Leviton Law Firm) seem to be stepping up their collection efforts against American companies that allegedly owe money to their Chinese suppliers.

First a bit of background on the Sinosure players that my firm’s international litigators see showing up again and again. I am providing this to give you background on how Sinosure typically handles its U.S. collection claims and on the people with whom you will likely need to deal.

The first to appear on behalf of Sinosure is usually an Illinois based company, Brown & Joseph. Brown & Joseph calls itself “a commercial and credit collection firm” and our clients pursued by Sinosure usually get an email from Brown & Joseph stating something like the following (I changed the company name and the amount to remove any identifiers:

Please allow this correspondence to serve as notice that this firm has been retained by China Export & Credit Insurance Corporation (Sinosure) on behalf of their policy holder Dongguan ________Sewing Machine, Ltd.

All further communications regarding this matter should be directed to my office.

The claimed amount of default is $345,862.23 in which the policy holder has now filed for credit insurance due to nonpayment.

Your immediate cooperation is needed to resolve this issue out of litigation. Pursuant to the attached Trust Deeds all rights have been assigned to Sinosure to collect this on their behalf.

Your failure to cooperate may result in future import and credit implications of goods from the People [sic] Republic of China.

With that being said, please review the attachments and acknowledge the invoices and amount owed of $345,862.23 for verification purposes.

In addition, I will anticipate your payment in full via wire directly to our firms [sic] escrow account. The wiring instructions are listed below. Please email me with the wire confirmation number and upon receipt I will confirm closure of this case.

Domestic Wire Transfer:

Routing Bank: First Bank & Trust, Evanston IL

ABA: 071925538

Account #: 4084168

Beneficiary: Brown and Joseph, LTD

If you are unable to remit payment in full, you will be required to contact me directly before the end of business tomorrow to discuss a reasonable payment plan for our client to review.

I look forward to your immediate response as I only have a limited time to resolve this file in my office prior to litigation.

This letter threatens both litigation against the U.S. company that allegedly owes money to a Chinese company and it also threatens to impact the U.S. company’s “future import and credit implications of goods from the People [sic] Republic of China.” I am not sure whether the threat to future imports and credit from China is deliberately unclear, but what Brown & Joseph seems to be saying here is that if you do not pay, Sinosure will cease providing insurance on your credit purchases from your Chinese suppliers. U.S. companies that buy products from China on credit need to take this threat very seriously.

Don Leviton seems to be the head attorney on Sinosure’s U.S. matters. Mr. Leviton’s Linkedin profile lists him as “counsel” to Brown & Joseph and also as a Principal at Atlas & Leviton. Here is Don Leviton’s profile on Brown & Joseph. Donald Leviton’s Avvo page lists him as a lawyer at the Leviton Law Firm in Hoffman Estates, Illinois. Here is what appears to be the Leviton Law Firm Website, but because it does not list any contact information nor any attorney names, it is possible this is not Donald Leviton’s law firm or that it was and no longer is. The Leviton Law Firm has this to say about commercial collections:

While not always possible, it was our philosophy and goal to negotiate amicable settlements and workouts between our clients and debtors in order that the parties may attempt to continue their business relationships in this very challenging economic environment.

Note how it says “it was” their philosophy. It’s not clear whether putting this in past tense is a typo, bad grammar, or if indeed its philosophy has changed. But I can tell you that from my firm’s dealings with Sinosure (when represented by Don Leviton or Leviton Law Firm or Brown & Joseph), I would use words like “relentless” or “unyielding” or even “tone deaf” to describe the philosophy of those who are tasked to collect a debt on behalf of Sinosure. I mention resolute and unyielding because it is difficult to impossible to get any monetary compromise and “tone deaf” because it is not uncommon for Sinosure to seek from foreign companies more than they appear to actually owe and then still not back down at all on the amount.

Elizabeth Dawson, who appears to be a Senior Account Executive, International Claims and Litigation, for Brown & Joseph seems often to be the first point of contact on a Sinosure collection matter. It is not clear whether Ms. Dawson is an attorney but I could not find an Elizabeth Dawson on Illinois’s roll of attorneys. Our clients pursued by Sinosure have also dealt with Michael Jones from Brown & Joseph, who also may or may not be an attorney. I cannot find information about Michael Jones online and so it is possible Michael Jones no longer works for Brown & Joseph and no longer represents Sinosure.

Brown & Joseph also seems to describe itself as a law firm and boasts of its international debt collection prowess and of its China expertise:

U.S.-Based Collection Law Firm.

Brown & Joseph, Ltd. is the leader in North American debt recovery for Chinese manufacturers who export goods all over the world. After 15 years of international recovery experience successfully handling cases for the groups that oversee credit insurance on exports, Brown & Joseph can offer significant resources that help to locate shipments, resolve disputes and gain immediate settlements, overcome language and cultural barriers, and recover money owed.

Our U.S. based firm has worked with many leading global trade credit insurers to reduce write-offs, protect their interests by legally securing debt in the local domicile, all while keeping your out of pocket costs minimal by working on a contingency basis. If there is no money recovered that is owed to you, there is no fee. Our contingency based fees for our recovery services (no success-no charge) apply the same to accounts whether the debtor company is foreign or domestic.

The #1 International Debt Recovery Agency in China

Over the past 11 years Brown & Joseph has come to be recognized as the #1 most effective collection firm recovering from U.S. businesses that owe international credit grantors….

Between China and the U.S., much like between any two countries, if you are not able to efficiently bridge [sic] gap between language and cultural barriers you will not succeed.  Brown & Joseph has succeeded. We currently have lawyers in both the U.S. and China and unlike most law firms, we perform all of our services on a results oriented contingency basis. We are only paid when we collect.

Am I the only one who finds it ironic that in the very sentence in which Brown & Joseph brags about being a bridge between language and cultural barriers it makes an obvious linguistic error?

So though should you do if Sinosure, Brown & Joseph, the Leviton Law Firm, Don Leviton, Michael Jones, Elizabeth Dawson — or, more likely some combination of these companies and people — are knocking at your door? There are many strategies you can employ but we are reluctant to reveal them online because we do not want to tip off the “enemy” to how we combat them.

I can though tell you that the first thing you should do is to make sure your intellectual property is in order in China, especially your trademarks. If Sinosure/Brown & Joseph/Leviton Law Firm/Donald Leviton/Michael Jones/Elizabeth Dawson are on your tail it is because a Chinese company is contending you owe it money. That Chinese factory is unhappy about not getting paid and one of the things it can (and often does) do to gain leverage against you is to register your brand name as its own trademark in China. If it does this, it will own “your” brand name as a trademark in China and this will allow it to stop your products from being made in China with your name on them and to stop products with your name on them from leaving China. See 8 Reasons to Register your Trademark in China. This sort of trademark usurping became so common in China it is now technically forbidden. Your factory company cannot register or hold your brand name as its own trademark. However, because pretty much every company in China is now aware of this prohibition, they also know exactly how to get around it. If you owe $345,000 to a factory in Dongguan, it will not register your brand name as its own Chinese trademark; instead, the owner of the Dongguan factory will get his cousin in Shenzhen to register your brand name as his company’s trademark, making it difficult to impossible for you to challenge it.

The best tactic is to register your brand names in China as a trademark NOW. See China: Do Just ONE Thing: Register Your Trademarks. And by now, I mean before Brown & Joseph or Leviton Law Firm demanding you pay Sinosure money you allegedly owe. But if you are too late for that and already in trouble with a Chinese company, if you act really quickly you may be able to preserve your name in China, but you need to be really careful. If your company is alleged to owe a factory company in Dongguan $345,000 and you have a trademark (or even a copyright or a patent) in China, those assets are sitting right there in China for seizure by whomever you owe the money. If a Chinese court enters a judgment against your company whatever China IP you have registered in your company’s name will be sitting right there in China available for seizure as payment of the judgment. What can you do to avoid this problem?

We have seen companies set up multiple companies with one of its companies buying products from China and another company owning its China trademarks. This can provide protection before you have a Sinosure debt collection, but if you are in the midst of such a problem the solutions get considerably more complicated.

The best protections against Sinosure are best enacted before you have a Sinosure problem. There are protections and defenses against Sinosure after it seeks to collect from you, but we cannot reveal those here because we do not want Sinosure and its minions to know what those are.

For more on dealing with Sinosure and China manufacturing disputes, check out China Sinosure: What You NEED to Know.

Categories: Chinese IP

The “Chicken Dinner” Guide: to Selling Online Games to China

China Law Blog - Thu, 12/07/2017 - 05:58
China online gaming laws

About a month ago, the Game Publishing Committee of China’s Audio-Video and Digital Publishing Association (中国音数协游戏工委) reported that China’s State Administration of Press, Publication, Radio, Film and Television (SAPPRFT) “holds a negative attitude” toward last-man-standing games like PLAYERUNKNOWN’S BATTLEGROUNDS (aka PUBG) and it would be difficult for this type of game to obtain a publishing permit in China. As we all know, “difficult” does not mean “impossible” and China’s gaming giant Tencent Holdings Ltd. has announced it will be bringing PUBG to China with a “socialist makeover.”

Though many gamers in China have had chicken dinners, PUBG has never been officially imported into China, meaning no Chinese government approval or local servers. Chinese gamers purchase PUBG (and many other games) through the widely popular gaming platform, Steam and play on servers hosted somewhere in the world other than China, like the US. This sometimes causes unstable network connections. Therefore, an official import is in demand.

  1. China prohibits Foreign investment in online game publishing.

As a basic rule, foreign companies are not allowed to invest in online game publishing in China. Reiterated in the 2016 Administration Rules for Online Publishing Service (2016 OPS Rules), online games are considered online publications and offering such publications via information networks is providing online publishing services. According to the Catalog for the Guidance of Foreign Investment Industries (revised in 2017), online publishing services fall under the industries where foreign investment is prohibited. Foreign developers, therefore, are prohibited from selling or operating online games directly in China.

  1. Licensing is key

Due to the restrictions stated above, foreign game developers must partner with a Chinese entity to enter the Chinese gaming market, and licensing is the way to go.

In choosing a China licensing partner, you want to first find out whether your potential licensee is qualified to sell and operate online games in China. Ideally, this potential licensee should own an Online Culture Business Operation Permit (网络文化经营许可证) and an Internet Publishing Service Permit (互联网出版服务许可证). If the licensee does not have these permits, it will not be able to apply to import foreign online games.

You will also need a solid licensing agreement to protect your legal rights and economic benefits. What we have previously discussed on China licensing agreements remains important and you should read the following:

Once a licensing agreement has been signed, the Chinese licensee will be in charge of registering your game with the Copyright Protection Center of China, applying for import approval, and the actual operation after the approvals. Since you as the foreign game developer will not be directly involved in these steps, it is critical you choose a Chinese partner capable of going through the complex approval process and operating your game smoothly.

  1. Approval authorities and content review

If you remember the fight over World of Warcraft years ago, you already know that GAPP (predecessor of the SAPPRFT ) and the Ministry of Culture (MoC) both asserted authority in approving the import of foreign online games.

As of now, approvals from both agencies are still required according to the 2016 OPS Rules and the Interim Measures for the Administration of Online Games promulgated by the MoC in 2010 (2010 Interim Measures). MoC focuses on the “cultural” perspective of the game, while the SAPPRFT focuses on the “publishing” side of things. Other than the nominal difference, it is unclear as to the exact role each of these two agencies plays in the approval process.

Overall, contents of online games are subject to censorship and games submitted for review must be fully developed and in their final operational version (or public beta version). The standard of content review is unclear. A few examples that may cause a failure to obtain approvals or the Chinese government to require further changes to a game include excessive violence, obscenity, compromising territorial integrity of the state (e.g. marking certain areas as independent countries), or discrediting the Chinese army. Again, an experienced Chinese game operator should be able to help the foreign developer avoid common pitfalls.

China’s online gaming industry is booming despite heavy regulations. Valued at $24.6 billion in 2016 (or more according to different market research reports) and growing. Like really growing. Strategic planning, choosing your Chinese partner wisely, and carefully negotiating and crafting your licensing agreement are nearly all that you need to navigate through this battlefield and earn your “chicken dinner.

 

Categories: Chinese IP

Selling SaaS in China: Resistance is Futile

China Law Blog - Wed, 12/06/2017 - 09:16

The market for software has shifted to the cloud. Using the Internet cloud, software products are no longer delivered as compiled programs installed on physical devices. The software is delivered online as an Internet-based service. This is known as Software as a Service (SaaS).

SaaS works fine when confined to the Internet of a single country or region such as North America or the European Union. The core concept of SaaS is that an open Internet exists on which SaaS can be built and delivered. But what happens when companies attempt to deliver SaaS into a closed Internet system?

That is the ultimate issue in providing an SaaS product in China. SaaS products not approved by the Chinese regulators are either blocked or in danger of being blocked. Gmail, Google Docs, Dropbox, and GitHub are all examples of SaaS products that are always at risk of being blocked in China. For SaaS products housed on servers located outside China, Chinese regulation makes active commercial exploitation difficult.

This applies to new SaaS products. Both IBM and HP are planning to roll out SaaS-based blockchain products. HP even calls their new offering “Blockchain as a Service.” Almost by definition, the blockchain system is intended to be global. But what happens when that service hits the closed Internet of China?

There is essentially only one way to deliver SaaS in China. The system must be housed on a server located in China and be licensed to a Chinese owned entity that has direct contact with Chinese customers.

The China server/China licensee model works like this:

1. The SaaS software is housed on a server located in China. This means the Chinese government will at all times have the right to access the server and inspect the contents of the software and all related data and information.

2. The SaaS service typically must be provided by a Chinese owned entity even though the regulations suggest this entity may be a Sino-Foreign joint venture.

3. The SaaS service is licensed to the Chinese entity in accordance with a very expensive and restrictive set of minimal requirements.

4. The SaaS software/platform has received the required approvals.

It has been difficult for many foreign SaaS developers to accept that the China server/China license model is in most cases the only way to sell SaaS products to Chinese consumers but the major SaaS players have already figured this out.

For example, the developers of video games have always been plagued by pirating in China. Game developers moved to the online model and developed the Massive Multiplayer Online Game model (MMOG), which is a form of SaaS. All of the major U.S. MOOG game developers now deliver their product in China using the China license model:

  • Valve Software’s Dota 2 is provided in China by Perfect World.
  • Blizzard Entertainment’s World of Warcraft is provided in China by Netease.
  • Riot Game’s League of Legends is provided in China by Tencent.

In the field of business software, Microsoft provides its Office 360 and Azure cloud service in China through a license with 21 Vianet.

Having accepted that a license in China is required, the real difficulties begin. The Internet infrastructure in China is quite advanced and due to the work of 21 Vianet and others, there is plenty of server space and bandwidth available for effective delivery of even the most complex SaaS products. The success of MOOG products in China is proof of this.

The real problem in China is in finding an appropriate partner/licensee. For the Chinese entity, operating as a licensee is expensive and technically demanding. So the real challenge in China is to find a licensee that is a) willing to take on the burden, b) has the technical capability to do the work, and c) the financial ability to take on the burden of ICP licensing, obtaining and maintaining approvals and then operating the complex server and software systems. Finding a willing licensee is oftentimes difficult for small SaaS systems and start-up products with no existing base of customers to provide immediate cash flow for the licensee.

For large, established SaaS providers, the issues are different but still significant. In this setting, due to the advanced technical requirements, the licensee will often be a direct competitor. So the challenge for large SaaS developers comes from managing the business in China, in protecting IP, and in dealing with the development and marketing of spin-off products. For many SaaS developers, these spin-off products are where the real value is generated.

In trying to evade the rules to avoid the China server/China licensee requirement, foreign SaaS developers are missing their opportunity to access the Chinese market. The real challenge is in finding ways to work within the China system in a way so the foreign SaaS developer both remains in control and earns a profit from China.

So resistance to China’s system for foreign involvement in SaaS is futile, but success is possible, so long as you get clear on what needs to be done.

Categories: Chinese IP

China Employer Rules and Regulations: A Must Have No Matter Your Size

China Law Blog - Tue, 12/05/2017 - 11:13
No company is too small for China’s regulators

If you want to be a well-protected employer in China, you need a well-written China employment contract and a China-centric set of Rules and Regulations, no matter your company size. Your employer Rules and Regulations should, at minimum, address your employees’ important rights (and obligations and labor disciplines. No matter how comprehensive your employment contracts, those cannot serve as a replacement for Rules and Regulations.

Our China lawyers are often whether a foreign employer with a tiny China workforce (say 1-19 employees) needs to have rules and regulations document. The emphatic answer is yes. Rules and regulations are in most places in China a flat-out requirement. And in those few places where they are not required (mostly in places foreign companies never go), they are still a necessity. But the main reason why you so need rules and regulations no matter how small your China operations is because for 99% of all things employer-employee in China, China does not make any distinctions between large and small companies. So just because you are small, it does not mean you are exempt from the requirement to have a set of employer rules and regulations. This is different from the U.S. and most of Europe where small employers generally enjoy a de minimis exception

I would even argue that having a good set of rules and regulations is even more important for a small company than for a big one and this is simply because not having one is so risky and small companies are usually less able to take risks. If you are a massive multinational and ten of your employees each win USD$100,000 against you because you had no rules and regulations, you will easily survive. But if you are a small business the impact of having to all of a sudden cough up a million dollars, the situation could be really bad.

The reality is that China’s employment authorities may cut some slack for Chinese-owned companies but they do NOT cut slack for foreign-owned businesses no matter their size. So to the extent your China advisors or employees are telling you that they see certain companies get away with certain improper employment practices, there is a very high chance those companies that got away with such practices are Chinese companies. If you are a foreign employer, you are virtually always under stricter scrutiny and this means both that the Chinese government is more likely to go after you on employment issues and your own employees will be a lot more likely to pursue litigation against you because you are foreign company; the Chinese government likes to see money go from foreign companies to Chinese citizens.

When we tell our clients that they need a set of rules and regulations no matter how small they are, they sometimes ask us for a template set they can then modify for their own use Would that it were that simple. We completely understand why our clients are irritated with the need for rules and regulations (especially those who are China start-ups with 1-3 employees) and want to do whatever they can to keep their costs down. Unfortunately, there is not much we can do. The problem is that rules and regulations are important and for them to be effective they must be tailored to suit the specific industry and type of business and location of each employer. And this sometimes means that the rules and regulations for a ten-employee company can be longer and more complicated than the rules and regulations for a  1,000 person company.

No matter your size, as a China employer you need employer rules and regulations and the complexity and length of those will be based on a more than just your size.

Sorry.

Categories: Chinese IP

The Five Kinds of China Trademark Squatters

China Law Blog - Mon, 12/04/2017 - 08:53

We are on record (and then some) about the importance of registering your trademark in China. In spite of our efforts — or perhaps because of them — nearly every week someone contacts us after discovering someone else has registered “their” trademarks in China.

Most people lump all such third party registrants together under the common rubric of “trademark squatters,” but in fact, the registrants can be separated into five distinct categories, and the appropriate response (and the likelihood of success) depends on the category in which category they fall.

 

Category One – The Extortionist

China’s laissez-faire attitude towards bad-faith trademark registrations has created a cottage industry for numerous “entrepreneurs”: individuals who register brand names belonging to foreign companies and then hold those brand names for ransom. Anyone who deals with China trademarks has run into this sort of trademark squatter. They have filed hundreds of applications, for a wide variety of brand names and in a wide range of Nice classes. The registrations may be for different sorts of goods or services than what the brand is known for. The trademark squatter has no connection to any of the brands, and no intention of ever using them in commerce. They are a classic non-practicing entity, and their sole intent is to monetize the trademark registration by selling it to the highest bidder. They will sometimes approach the trademark owner, or they may sell the trademark to another third party on one of China’s trademark clearinghouse websites. The prices can vary but US$10,000/registration is a common starting bid.

Such registrations are the very definition of bad-faith, and you would think they would be easy to invalidate. Not so. China is slowly getting better at dealing with these situations, but even in egregious cases, it’s far from a slam dunk. The typical route involves an invalidation proceeding and an appeal and then maybe another appeal. All of this can take years and cost thousands of dollars, and there’s no guarantee of success. It’s easy to see why many foreign brand owners just pay the money and move on, as with a nuisance lawsuit. Alternately, some brand owners will wait three years and file a non-use cancellation. See China Trademarks: When (and How) to Prove Use of a Mark in Commerce.

Category Two – The Counterfeiter

Companies find the first category of trademark squatter exasperating, but they find the second category infuriating. These squatters have registered foreign companies’ trademarks not to hold them for ransom, but to use them in commerce. Indeed, these squatters’ business model is to produce counterfeit goods they can sell in China (and in any other country where the foreign company has not registered its trademark) without fear of reprisal from the true brand owner – because the squatter legally owns the trademark in China! Sometimes they will sell the same kinds of goods as the true brand owner, sometimes not – it all depends on how well-known the brand is, and what the squatter thinks will generate more money for them. Oftentimes you’ll see these squatters register several foreign brand names in China, all in the same classes of goods. If one foreign brand is good, four are better.

It is usually more expensive for the true brand owners to purchase these registrations because the registrations are worth more to the trademark squatter. Moreover, a non-use cancellation will not succeed, because the marks are actually being used in commerce. It is sometimes possible to succeed with a bad-faith invalidation, but this will largely turn on whether the mark was well-known in China, which is a difficult thing to prove. For many years the de facto Chinese position has been that if foreign brand owners cared about their marks in China, they should have registered them there. Here, the alleged trademark squatter is using the mark in commerce and probably also employing people and paying taxes on its income. That looks a lot better to Chinese authorities than a sole-proprietor non-practicing entity who lives with his parents in Kunming or Kansas.

 

Category Three – The Stiff-Arm Competitor

The third category of squatter looks a lot like the second category – they file trademarks covering a certain, fairly narrow set of goods. But this type of squatter isn’t a counterfeiter and has no plans to use the marks in commerce. Rather, this squatter is your competitor, and their goal is to prevent you from entering the Chinese market (at least under your preferred brand name). The more specialized the market, the more likely this is to occur because everyone knows all of the other players. More than once I’ve seen a Chinese manufacturer in a specialized industry register the trademarks of all its European and American competitors. They then offer the competitors a Hobson’s choice: buy the trademark at a grossly inflated price (upwards of $250,000K) AND designate the competitor their exclusive distributor in China, or say goodbye to their brands in China.

The stiff-arm competitor often also oftentimes will threaten to block products manufactured with its trademark by anyone else from leaving China. In other words, they may threaten to effectively shut down your entire business worldwide by choking off your sole production point.

Brands that are actually well-known in China may have some success in wresting trademark registrations from such registrants, but as noted above that rarely happens. Most foreign brand owners in this position are out of luck. The argument that these trademark squatters gamed the system is not going to get much traction.

 

Category Four – The “Helpful” Supplier

Sometimes companies will find that their brand names have been registered by a familiar entity – their own supplier or distributor in China. If the supplier or distributor is still producing or distributing goods for the company, the proffered explanation is usually benign: the supplier or distributor registered the mark to prevent any rapscallion squatters from doing so first. This may be true, but the brand owner should wonder why the supplier/distributor didn’t inform them first and/or ask if the brand owner wanted to register the mark itself. Nonetheless, if the relationship is still positive, it is a relatively straightforward process for the supplier/distributor to assign the mark to the brand owner. Some suppliers/distributors will attempt to retain ownership of the trademark but this should be resisted.

If the relationship has turned ugly, which is usually the case when the trademark owner is a former supplier/distributor, a simple assignment may be difficult to procure. But this situation is the easiest one in which to prove a bad-faith registration. So long as you can prove the existence of a business relationship with the supplier or distributor (e.g., through purchase orders, contracts, and other documentation), it is quite likely the squatter will be forced to give up the registrations. Needless to say, the process is a lot easier if you have a signed, chopped manufacturing agreement or distributor in which the supplier specifically agrees not to register your IP. See China Trademarks and Your Chinese Distributor.

 

Category Five – The Coincidental Copycat

The last category isn’t really a traditional trademark squatter and arguably shouldn’t even be part of this list. Occasionally, someone in China registers “your” trademark because they came up with it on their own independently. This only happens with word marks – it is highly improbable two applicants would come up with the same logo by blind chance. In these cases, the trademark owner may be willing to sell the trademark, but if they’re not, there’s little you can do about it. The registrant simply followed the dictates of China’s Trademark Law: they were the first to file (not you), and so they get to keep the mark.

In sum: if you find that your brand has been taken by a trademark squatter in China, first determine the category they fit in, and then plot your strategy accordingly. Better yet, register your trademark right away and prevent having to strategize at all.

 

 

Categories: Chinese IP

China Contract Templates for $99 Each

China Law Blog - Sun, 12/03/2017 - 05:58
China Contract Templates. Not Gonna Do It.

Now that I have your attention.

Neither our law firm nor any good law firm of which I am aware ever sells China contract templates. There are many reasons for this but foremost is usually that templates virtually never work for China and they often can be more harmful than having no contract at all.

And yet, our China lawyers are constantly getting asked for “templates” for even relatively complicated China deals. We have been asked for joint venture template agreements and our response to that is how can we even provide you with such a template unless and until you know what the terms of that agreement will be? I mean, we have done joint venture agreements where our client has contributed twenty million dollars to the joint venture and all they really wanted out of it is guaranteed product pricing for the next 15 years and we have done joint venture deals where our client has provided no money — just technology and equipment and in return gets 60 percent ownership of the joint venture and control over just about everything it does. Do you really think we have a template that covers every contingency?

Your lawyer’s value is oftentimes more in figuring out what a contract should say than in actually drafting it and the former usually takes as much or more time than the latter. Our China Manufacturing Agreements and our China Licensing Agreements are a great example of this and we get the “template question” a lot on both of these. We are also often asked by potential and actual clients whether it would save them money to have their in-house lawyer or their less-expensive local domestic lawyer draft such an agreement first and then have my firm’s China lawyers use that draft contract as our template. My answer to that question is usually something like the following:

We have drafted hundreds of China licensing agreements and manufacturing agreements and we don’t use any of them as a “template.” What we do is to first gather up the facts from our clients and figure out which of our many contracts — if any — we should use as a model in creating what will essentially be a new contract for you. Most of the time we end up pulling sections from multiple contracts for a new, highly customized contract. Our agreements have been specifically drafted for use in China and that means they are dual-language agreements with Chinese as the official language. We usually (but NOT always) draft them under Chinese law and we make sure to draft every provision to benefit you as a foreign company that is licensing its products or services in China or having its products manufactured in China. Our existing contracts are as close to ready as you can find and it, therefore, does not make sense for you to pay another lawyer who knows nothing about Chinese law to create a brand new English language contract which will not make sense for China. Not only would the money you pay that lawyer go to waste, but my law firm’s fees would increase because instead of our starting with our own Chinese and English contracts as models, we would be starting with an English language contract that will not be close to what makes sense for what you are looking to do in China. We would have to revise nearly every provision in the contract you give us to make it China-appropriate and it would likely take us twice as much time to do that than for us to just use our own previously drafted contracts as the foundation for yours. It is not helpful to us to have a common law contract [China is a civil law system] based on a highly idealized and impractical American/European practice that has no applicability or use in China.

China employment documents provide another good example of where templates fall short. We are often asked to draft China employment contracts for China WFOEs and China Joint Ventures. Our first response is to ask the potential client whether their Chinese entity already has a set of Rules and Regulations (sometimes called employer manual or employee handbook). If the answer to that question is yes, our lawyers will use those Rules to determine what should go into the employment contracts.

If the client does not have any Rules and Regulations our response is to say that we cannot draft the employment contracts standing alone; we need to draft both the employment contracts and a set of Rules and Regulations (and sometimes more). Our reasoning on this is three-fold. One, nearly all locales in China now require employers to have Rules and Regulations, especially those locales with more than a handful of foreign companies. Two, having an employment contract without any Rules and Regulations is like having a car without an engine; it just doesn’t work. Without such Rules and Regulations you can not discipline or terminate your employees and you are at great risk of your employment policies and decisions being fodder for employee-employer disputes. The third reason is both more personal and selfish: we do not want our law firm’s name associated with an imminent disaster. This third reason is also why good law firms do not sell templates.

After we explain the need for Employer Rules and Regulations, the client will sometimes request that we just use our “model Rules and  Regulations to keep costs down.” Again, we have to explain to them why we have no such model and why such a model can never work. Our typical response is something like the following:

Your Employer Rules and Regulations need to match what you are doing in China and where you are doing it. This means that for us to provide you with Rules and Regulations that will work we must gather up all sorts of facts before we can even start. If you are a factory in Qingdao, we cannot even use the Rules and Regulations we did for an accounting firm in Qingdao two months ago? Nor can we use the Rules and Regulations we did for a factory in Suzhou three months before. We cannot even use the Rules and Regulations we did for a factory in Yantai six days ago because even though Yantai and Qingdao are in the same province, their employment laws and practices do not align. And that factory in Yantai was really tough on its employees and I understand that it is important to you to be viewed as a great employer.

A China employer’s Rules and Regulations vary depending on the type of company, the type of employees, the goals of the company, and, most importantly, its location. Just by way of an example, the overtime rules are going to vary greatly for a CEO as compared to factory workers and those rules are also going to vary greatly as between Chengdu and Suzhou. We have many Rules and Regulations serve as appropriate starting points (usually in combination) but before we have any idea which of our many existing Rules and Regulations we can use to save time in drafting yours, we first need to know a lot more about you. We also must always make sure everything in the Rules and Regulations we provide to you is up to date and since the relevant laws and regulations constantly change in China, this itself is never automatic. After we have done all this we can start drafting your customized Rules and Regulations in both English and Chinese.

Oh, and one more thing. It is critical that both the English and the Chinese be well-written and clear because both languages will be important down the road. The Chinese is important because that is the official language and the language on which the courts and administrative bodies will rely. The English is also important, however, because your HR people will likely be using the English language portion in making their employee decisions.

I recently explained to an incredibly insistent emailer why we would not sell him any of our existing China contracts for him to use as a template:

We have never sold a China contract as a template and we never will. First off, it would be a huge disservice to you because we have literally hundreds of contracts for everything we do and unless you were to first retain us as your lawyers, we would not have any basis for determining which of these contracts makes sense for you even as a starting point. Our making that determination is itself providing you with legal advice and to do that we would first need to run a conflict check and then onboard you as a client and then work with you in determining the appropriate model contract. And here’s another thing: around half the time when a company thinks it needs a particular contract for what it is doing in China, it actually needs an entirely different one, and we only discover that after gathering up all the relevant facts. So take your case. You say that you need a distribution agreement but what you may actually need is a reseller agreement. And for us to even know that, we need a lot more information.

Second, whichever of our contracts we end up giving you will not be right for what you are doing and whatever changes you make to it will only make it even less right. There is a lot more to doing a deal with a Chinese company than simply sending it a contract and getting it to sign it. You first need to do at least basic due diligence to make sure the company you have been negotiating with is the same company signing your agreement and to make sure you have the company’s name and address correctly. This is often far more complicated than people think. At least 30 percent of the time the contracting party is actually a Hong Kong or a Taiwan entity and in those cases, a PRC contract does not even make sense. I am not going to sell you a contract that has a 30% chance of being for the wrong country! At least another 30 percent of the time we find irregularities in the company information and we need to investigate further to clarify. And then there are the times we determine there is actually no company at all and the Chinese “company” was actually a complete fraud. See China Fraud Season Starts Early This Year.

And what will you do when (not if) the Chinese company says it agrees with 12 of the 17 provisions you propose in your contract, but it wants you to make specific changes to the other five? You not only will not know how to make those changes (remember the official version of this contract is in Chinese), you likely also will not know whether it makes legal or even business sense for you to do so. Your changing one “small” provision could even render the entire contract unenforceable.

Just by way of one example: the contract damages provision is a critically important element of nearly all China contracts. It is often the key provision for ensuring that your Chinese counter-party abides by your agreement. See The Effective China Contract: Liquidated Damages for why this is the case. And yet we never know what to fill in as the amount of contract damages until the very last minute because that amount must be determined on a case to case basis, using all sorts of factors in making the determination. How will you fill in that amount when you do not even know the factors to use in determining it? And even if you had a list of those factors how would you know how to apply them? We could spend a few hours trying to teach you the factors and how to apply them, but in the end, your choice of an amount could never be nearly as good as ours because ours is based on decades of experience and thousands of China contracts. See China Contract Damages: More Art Than Science. A bad decision on this alone would weaken or even nullify the value of your even having a contract.

So no, we won’t sell you one of our contracts as some sort of template. The last thing we want is our law firm’s name associated with something we know cannot work.

Another lawyer in my firm once wrote the following email to a client to explain why we could not just pull a template off the shelf for them to give to their in-house counsel to use in drafting the contract needed:

We don’t use “templates” for our agreements. After a lot of analysis, IF we find what the foreign buyer is trying to do fits into a pattern from a previous transaction we have done, we will, of course, use an agreement from a previous transaction as a model for the current transaction. But even in the most basic transactions, what we do is to customize it for the current transaction.

In drafting pretty much any contract for China there are literally dozens of variables that can be combined in a nearly infinite number of configurations. So the final contract from one transaction may have no application to any other transaction. This is why providing a contract from a past transaction will have no benefit to the Western side and would likely only harm it.

And then there is the issue of dealing with the Chinese counter-party’s response. Did the Chinese side change the Chinese and not the English, as they so often do? Did the Chinese side redline in a way that the changes to the Chinese portion are even apparent? More importantly, are the Chinese side’s changes normal technical changes that are part of normal business practice (45 days to deliver a product instead of 30 days) or are their changes destructive to the whole approach, such as: “no, you do not own the technology, we do.” Or, “no, we won’t provide any warranty at all.” Or, “no, we own the molds, not you.” It takes a deep understanding of Chinese law and Chinese business to deal with these sorts things.

In drafting our contracts, we do usually pull some language from other contracts, such as confidential information language. However, the core agreement is almost always unique to the specific client before us and when we do use prior language, we nearly always revise it to customize it for the specific client and the specific transaction.

From having written thousands of China agreements, we know there are certain issues that need to be resolved pretty much every time. So we work with our clients to identify those issues and then we work with them on how they want to deal with those issues and then we put the agreement together to achieve the goals our client has told us it has. Of course, for some of these components, we use as a base some of the language that has worked in the past in China. This is the benefit of working with us: we know what works and we know what fails. But the resulting contract in each case is unique.

So in that sense, there is no template. There is just decades of experience in drafting agreements for doing business in China or for doing business with China. This is why whenever someone asks me to send them a “template” agreement I tell them I cannot because I have no way to know which of the nearly infinite number of alternatives they should follow. How will they pick and choose from a dozen options for a relatively simple provision? What is unique about their situation? Will the most common solution we have used in the past even make sense for them? Does it make sense for their industry? Their business? Their product? Their location? What if the law has changed? What if the law changes two days after we start drafting?

I usually propose to each client three options for every important issue and I usually come up with those three from about a dozen possible. Let’s suppose there are ten important issues in their contract — this is probably a fairly typical number. Each selection of an option affects all of the other options, often in ways we have previously encountered. Before the client answers the questions, we don’t know even what structure to use. After they answer the questions, the agreement that meets all their needs does not exist.

Our approach to China contracts is based on three supports: 1) Decades of China experience, 2) A deep understanding of the Chinese civil law system and the Chinese court system, 3) A deep understanding of how contracts actually work in China. If your in-house lawyer combines all three of these, you do not need us for your contract.

Now you know….

Categories: Chinese IP

Seminar on China’s Employment Law Landscape: Seattle, December 7

China Law Blog - Sat, 12/02/2017 - 05:58
Please come to Grace’s talk on Thursday

Our lead China employment lawyer, Grace Yang, will be speaking at a Washington State Bar Association (WSBA) seminar in Seattle this Thursday, December 7. If you are in Seattle and doing business in China or even just thinking about doing business in China, I cannot urge you strongly enough to attend.

The full name of the talk is China’s Employment Law Landscape: What You Need to Know. And trust me when I say there is probably a lot you need to know. I say this because foreign companies doing business in China seem to get employment and labor law issues wrong maybe more than anything else. And, frankly, I don’t blame them. Until Grace joined our law firm, none of our China lawyers would touch most China employment law matters because none believed themselves qualified to do so. We were of the view that only lawyers who focus their practices on China employment and labor law should be touching such matters. The reason for this is simply because China’s employment rules and laws are highly localized and always changing and, most importantly, oftentimes unwritten. The unwritten part means that having a good relationship with the local labor and employment bureaus is absolutely key.

Grace has become our go-to person on everything related to China employment law. She splits her time between Beijing where she grew up and attended Beijing University Law School and Seattle — Grace has her J.D. law degree from the University of Washington. Grace recently wrote and had published (just a couple of months ago) what would best be described as a handbook on China employment law. The book is titled, The China Employment Law Guide: What You Need to Know to Protect Your Company and you can get it in either paperback or in a digital format. I always recommend you get the paperback version because it is the sort of book you want on your shelf for quick access whenever you have a China employment law issue and so you can easily share it among your HR team and your managers. Go here on Amazon to get your own. 

Grace’s talk will go from noon on Thursday until 1:30 p.m. and it will be at 600 Stewart Street, Suite 205 in downtown Seattle. To register in advance, go here, or show up at the event starting at 11:30 a.m. You will get 1.5 hours CLE credit for attending. The WSBA describes Grace’s talk as follows:

China’s employment laws are complicated and highly local. Foreign companies doing business in China face complex China labor and employment issues and questions every day – often without even realizing it. What works in the United States has very little in common with what works in China. Employment compliance has become one of the most important issues foreign companies face in China and it is the rare foreign company that gets it right. Employee disputes are becoming considerably more common and government enforcement is getting significantly more stringent. It virtually always costs less for your company to deal proactively with China employment law issues than to wait to address them only after they have come a dispute. As such, it is imperative that you understand the framework of Chinese employment law and steps you can take to mitigate risk.

At the beginning of this post, I said that if you are doing business in China or thinking of doing business in China you should attend this talk. I am sure this caused at least some of you to think that your attendance is not necessary unless you actually have employees in China. Wrong. As is mentioned in the seminar description in the proceeding paragraph, “foreign companies doing business in China face complex China labor and employment issues….every day — often without realizing it. Pretty much every month for the past five years some foreign company has called one of our China lawyers with an employment problem that arose because they did not realize they had an employee in  China. See Doing Business in China with Deportation or Worse Hanging Over Your Head to see what I am talking about.

I recently heard Grace give a similar talk as part of a webinar and it was fantastic (and the reviews from listeners supports me on this) and essential. If you practice labor or employment law, if you are interested in labor or employment law, if you have any interest in China or anything at all to do with China, I urge you to attend. And if you will not be in town — heck, even if you will be in town), I  also urge you to buy the book.

So just sign up here and go. We’ll see you there.

Categories: Chinese IP

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