Chinese IP

China: Do Just ONE Thing: Register Your Trademarks AND Your Design Patents, Part 1

China Law Blog - Sun, 07/24/2016 - 16:58

Okay, so that’s two, but you get the point.

Way back in 2011, I wrote a blog post entitled, China: Do Just One Thing. Trademarks. As you can guess from the title, the point of that post was to emphasize that no matter what else a foreign company does when doing business in or with China, it must, must, must file to secure China trademarks for its trade names and logos, because if it does not, someone else will and then the foreign company will not be able to use its trade names or logos in China, even if all it is doing is having its products made in China for export.

In talking with foreign companies looking to do business in or with China, I talk about how NNN Agreements can help prevent their China counter-party from competing with them, contacting their clients/customers, and duplicating their products. And if they are going to be manufacturing in China, I tell them about the importance of Product Development Agreements for protecting their intellectual property before their product is fully developed, and Manufacturing Agreements for protecting their intellectual property after their product is developed and for ensuring quality and timely deliveries.

These agreements are all very important and in some cases, not having one can be fatal to a company. But with the exception of an NNN Agreement, they are relatively expensive and in some cases — rightly or wrongly (almost always wrongly), we get foreign companies who believe that their Chinese counter-party can be fully trusted and such agreements are just not worth it to them. I have better things to do than to argue with such an analysis and so I don’t.

But when it comes to the need to have a trademark, I always fight back because I and the other China lawyers at my firm have seen far too many companies go under after having lost their trademark to China and having their goods seized at China customs for violating someone else’s trademark and then not being able to switch their manufacturing to some country other than China. When it comes to the need to secure the appropriate trademarks in China, I am blunt: anyone who doesn’t do it is making a big mistake:

I tell them how if they do nothing else, they should immediately register their trademarks in China. This one usually surprises them and they often think I have misunderstood what they are planning for China. They at first do not understand why I am emphasizing the need for their filing a trademark in China when they have no plans to sell their product in China. I then explain how China is a first to file country, which means that, with very few exceptions, whoever files for a particular trademark in a particular category gets it. So if the name of your company is XYZ and you make shoes and you have been manufacturing your shoes in China for the last three years and someone registers the “XYZ” trademark for shoes, that company gets the trademark. And then, armed with the XYZ  trademark, that company has every right to stop your XYZ shoes from leaving China because they violate that other company’s trademark.

And this happens constantly.

About a year ago, we started seeing the same thing with design patents and in tomorrow’s post I will explain how that works and what you need to do to prevent it.

 

Categories: Chinese IP

China Trademarks: What’s your Chinese Company Name?

China Law Blog - Sat, 07/23/2016 - 14:24

Though I generally recommend foreign companies filing for trademarks in China avoid the Madrid system and file a national application – that is, an application directly submitted to the Chinese Trademark Office (CTMO) – the Madrid system does provide one minor advantage. National applications must include the applicant’s Chinese name, whereas Madrid applications have no such requirement. Companies often spend considerable time and money in determining their Chinese branding strategy, and rightfully so. The annals of advertising are filled with tales of inopportune translations when companies go abroad. Indeed, we work with marketing companies whose sole raison d’être is to help foreign companies with branding in China.

That being said, it’s no big deal if you haven’t come up with a Chinese name for your company but still want to file a trademark application in China. First, it’s important to distinguish between the Chinese name for your company and the Chinese name for your product. For some companies, the company name is the brand; for other companies, the company name is of little import. Second, and most importantly, an applicant’s Chinese name on a trademark application is solely used for internal purposes at the CTMO. It has no meaning, relevance, or effect in the outside world.

If you have already determined the Chinese name for your company, then by all means use it in the trademark application. But if you don’t have a Chinese name and you don’t have the time, money, or interest to create one, it doesn’t matter what name you choose. You will want to continue using that name for any further trademark applications (to maintain internal consistency). But in all other respects, it will be as if your company does not have a Chinese name, so when it comes time to select a Chinese name for use in commerce, you won’t be limited by your choice on the CTMO application.

Categories: Chinese IP

Quick Question Friday, China Law Answers, Part XXIV

China Law Blog - Fri, 07/22/2016 - 09:35

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.

I got an email the other day from a reader who linked over to a Vox article, entitled, Bill Clinton and Loretta Lynch’s meeting scandal is every Clinton scandal in miniature, along with the following text:

How can you always say China is the most corrupt country in the world when your own country is equally as bad? It is not fair that you always focus on China and ignore your own country. You should cover the Clinton scandals and how influence has been for sale in the United States with lobbying for the last century. Why do you never compare levels of violence between the United Stats and China either?

We actually get such emails and comments all the time (usually with a lot more vitriol), both here and even more often on our Facebook page, where there was one person who would leave a similar comment just about every time we posted anything remotely negative about China. Here though, once and for all, is the answer to the above email and to the many that we receive:

  1. What are you even talking about? We have never called China the most corrupt country in the world, nor do we consider it as such.
  2. We fully recognize that the United States is far from perfect.
  3. Read the title of this blog. It starts with “China” for a reason.

Any more questions?

Categories: Chinese IP

Sourcing Product From China: You Should Know About Importer of Record Liability

China Law Blog - Thu, 07/21/2016 - 09:00
Don’t get crushed when you import

The US Importer of Record is liable for antidumping and countervailing duties tied to the product being imported. The Importer of Record is the company listed in Block 26 of the U.S. Customs 7501 form. When I told a US Senator this, he responded by saying he “thought the Chinese company was liable for the duties, not the US company.”

Under US Antidumping, Countervailing Duty and Customs laws, the Importer of Record must exercise reasonable care in importing products and in filling out Customs forms. The Importer of Record must correctly state a product’s country of origin and also whether Antidumping and Countervailing duties apply to the imported product. A knowingly false statement on a Customs form constitutes criminal fraud.

If AD or CVD rates go up in a subsequent review investigation, the Importer of Record is retroactively liable for the difference, plus interest. Retroactive liability for AD and CVD cases is a particular problem involving goods imported from China, because the U.S. Commerce Department treats China as a non-market economy country. Dumping is generally defined as selling products in the United States below their normal value, which generally means selling a product in the United States below its price in the home market or below its fully allocated cost of production.

Since China is a non-market economy country, Commerce refuses to use actual China prices and costs to determine whether a Chinese company is dumping. It instead uses complicated consumption factors for raw materials and other inputs and surrogate values from five to ten constantly changing countries to calculate the Chinese company’s production costs. All this makes it impossible for the Chinese manufacturer/exporter to know whether it is dumping, never mind the US importer.

In the Mushrooms from China antidumping case, from the time the antidumping order issued in 1999 through numerous subsequent yearly review investigations, many antidumping rates were in the single digits because Commerce used India as the surrogate country. But when Commerce switched from India to Columbia as the surrogate country in 2012, the Antidumping rates went from less than 10% to more than 200%. The Importers of Record were then liable for the difference in the duty rates, plus interest.

How can you as an importer of products from China (or from anywhere else) avoid getting hit with a massive antidumping or countervailing duty fee? Do not become the Importer of Record. The dollars saved by this can be staggering.

In the Wooden Bedroom Furniture case, a US furniture importing company I had convinced not to be an Importer of record got off without having to pay a penny, while its Chinese manufacturer had to pay approximately 400 million in retroactive liability. Many US import companies were not so lucky and went bankrupt.

What if your company is the Importer of Record and your antidumping or countervailing rates go up? U.S. antidumping and countervailing duty laws are remedial, not penal. This means requesting review investigations at the Commerce Department, appealing adverse rulings to the Courts and working with Customs often can substantially reduce or even eliminate any penalties. Chinese exporters also can (and often do) use the Commerce review process to reduce their antidumping and countervailing duty rates so they can export to the US again.

Categories: Chinese IP

How to Protect Your IP From China: Beware of Subcontractors

China Law Blog - Wed, 07/20/2016 - 12:54
         Was it a subcontractor?

One of the primary ways foreign companies lose their IP to China is via infringement by manufacturing or service subcontractors. Our China lawyers constantly see/hear of foreign companies that enter into “iron-clad” contracts with a primary Chinese company, only to lose their IP to a subcontractor for whose behavior the primary Chinese company has no responsibility. Often, the subcontractor is in some way related to the primary Chinese company and the infringement is intentional. In other cases, the subcontractor has no direct relationship with the primary Chinese company and is simply trying to create a new business for itself. Either way, subcontractors are a big threat to your intellectual property and they must be treated as such.

There are essentially the following three options for dealing with subcontractors in your China contract:

1. Prohibit subcontracting. This is our preferred option but it is often not practical. You should, however, always consider how it seldom it makes sense for your primary Chinese company to need to contact subcontractors at the NNN stage, rather than later at the product development or manufacturing stage. A China manufacturer (or service provider) that is claiming it must deal with its subcontractors at the NNN stage is oftentimes a Chinese manufacturer planning to steal your intellectual property. Some of the larger electronics and Internet of Things (IoT) hardware manufacturers are notorious for this.

2: Permit subcontractors, but make your primary Chinese contractor liable for the subcontractors’ conduct. This is the standard option to which most Chinese manufacturers and other Chinese companies will agree, simply because it is the easiest system to manage. In the last ten years, virtually no legitimate Chinese manufacturer or other Chinese company has objected to this option in the NNN stage for the reason discussed above: no subcontractors are usually involved at the NNN stage.

Option 3: Limit the use of subcontractors. We often draft contracts that limit the Chinese company to using subcontractors only when the following conditions are met: a) the primary Chinese company gives written notice of each subcontractor, b) our foreign client formally approves the subcontractor and c) the subcontractor enters into a separate NNN contract with our client. This is actually a very good system, since it gives you a direct contractual relationship with the subcontractors who have all signed binding contracts that explicitly protect your IP. Note though that this almost never comes up at the NNN stage, only after. This requires you draft and get signed formal agreements with each subcontractor and you may have to deal with your Chinese manufacturer (or lead service provider) that is worried about you cutting them out by going direct to their subcontractors.

Even though subcontracting should not be relevant at the NNN stage, we often put a subcontracting provision in our NNN Agreements because it can force the primary Chinese company to reveal that it is not really going to be doing the manufacturing or the work, but instead will be using a subcontractor to do everything.

Categories: Chinese IP

Have Your Checked Your China Manager?

China Law Blog - Tue, 07/19/2016 - 19:46

Back when I used to watch a lot of horror movies (a long long time ago), When a Stranger Calls was one of my favorites. Spoiler Alert: It was about a babysitter who was experiencing weird things and constantly getting calls from someone who kept asking “have you checked the children.” To make a long story short, the creep was in the house.

I mention that movie today because our China lawyers have been getting a spate of calls lately to assist from American and European companies who have just learned that the creep is in their house.

Let me explain by way of some examples:

1. U.S. company terminates its head of China operations and then a couple of its China employees reveal that the U.S. company’s leading supplier is owned by the former head of China operations who — almost needless to say — has been charging about 40% over market.

2. Spanish company terminates its head of China operations only to learn that it actually does not have any China operations. The WFOE this person claimed to have formed and which the home office for the last three years believed was there actually wasn’t. The head of China operations had pocketed all of the money for the WFOE and all of the money marked for China income taxes as well. Fortunately, it turned out it never made sense for this company to have a China WFOE in the first place and so it exited China and now contracts with a Chinese company to accomplish what its fake WFOE had previously done. I say fortunately because if it had to have remained in China, it would have been at risk for not having paid its China taxes. For more on this fake WFOE phenomenon check out So You Think You Have A China WFOE Or Joint Venture Or Trademark. What Makes You So Sure?

3. American company flies to China to meet with its nine employees, only to learn from one employee that it has only five employees and that the head of its China operations has been pocketing the extra funds that allegedly went to pay the salaries of the four phantom employees. For the past three years!

Why are we getting so many of these calls now? All of them can to at least some extent be traced to the downturn in China’s economy. Many foreign companies are checking on their Chinese operations more closely than previously simply because they are concerned because they are less profitable. To quote Warren Buffett: “Only when the tide goes out do you discover who’s been swimming naked.”

Do you really know who’s in your house? Have you checked your children?

 

Categories: Chinese IP

China Labor Dispatch Rules: Why Did You Ever Think It Would Be Easy?

China Law Blog - Mon, 07/18/2016 - 08:35

China permits only the following three categories of “dispatched” employees to be hired by a labor dispatch agency:

  1. Temporary employees with a term of no longer than 6 months.
  2. Auxiliary employees who provide supporting services that are not central to the employer’s core business.
  3. Substitute employees who perform tasks in replacement of permanent employees during a period when permanent employees are unable to work due to off-the-job training, vacation, maternity leave, etc.

Both the PRC Labor Contract Law and the PRC Interim Provisions on Labor Dispatch require that a dispatch agency and a dispatched employee enter into a labor contract for a fixed term of no shorter than two years. It should be noted that the labor dispatch agency is for legal purposes treated as the employer in this relationship.

As covered in some of my previous posts, China’s labor law mandates that an employee is entitled to an open-term contract after having executed two consecutive fixed-term labor contracts (unless grounds for termination exists). So a question arises: if a labor dispatch agency has consecutively executed two fixed-term labor contracts with an employee, will the employee be entitled to an open-term contract? In other words, will a dispatched employee be treated the same as a regular employee under this circumstance? Note that China’s labor law clearly states that at the time of renewal or execution of the labor contract, unless the employee requests a fixed-term labor contract, an open-term labor contract must be concluded.

Consider two recent cases in Beijing (I have simplified both a bit for purposes of this post). In the first case, after having executed two consecutive fixed-term contracts, the employee requested an open-term labor contract, however, the labor dispatch agency ultimately refused and served the employee with a termination notice. The labor dispatch agency argued that the law on open-term labor contracts does not equally apply to dispatched employees. The employee sued and the Second Intermediate People’s Court of Beijing ruled against the labor dispatch agency and instead held that China’s law regarding open-term labor contracts does apply to dispatched employees. And then, just as would have been the case had the employee worked for any other company in China, the Court required the dispatch agency pay the employee double the employee’s monthly wage and forced it to enter into an open-term contract with that employee and pay that employee damages for wrongful termination. And here’s the kicker: the company that retained the labor dispatch agency and used the employee was deemed jointly liable for both of those amounts (the wages and the damages), meaning it too was on the hook for payment.

In another case involving a dispatched employee, the Xicheng District People’s Court also concluded that China’s labor law applies with equal force to labor dispatch agencies. This court reasoned that even though the PRC Labor Contract Law states that a labor dispatch agency and a dispatched employee must enter into a labor contract for a fixed term of no less than two years, this provision does not preclude such a labor contract from being a regular labor contract. The court also discussed how since the law treats a labor dispatch agency as an employer for legal purposes, this means the labor dispatch agency is subject to the same responsibilities as an ordinary China employer, including the obligation to execute an open-term contract when conditions for being required to do so have been met. The Court went on to make clear that the general intent of China’s Labor Contract Law is to protect employees, and allowing a labor dispatch agency to be exempt from this requirement on open-term contracts would be contrary to that intent.

Though it is true that Beijing tends to be a pro-employee municipality and the above cases are not necessarily conclusive regarding how similar cases would turn out in other municipalities, this does reinforce the Chinese government’s generally negative view of labor dispatch situations. For how China’s on the ground labor law can vary from city to city, check out China Employment Law: Local and Not So Simple

The bottom line here is the same as the bottom line when doing just about anything regarding China employment law:

  1. Assume the Chinese courts will favor the employee.
  2. Figure out all of the laws and rules, and especially the local rules and cases, before proceeding.
  3. Know that China does not generally like the hiring of workers via third party hiring agencies. It never has and its distaste for such arrangements just keeps growing.
  4. You as the company that retains the third party hiring agency and uses the workers provided by the third party hiring agency can be held liable and hit with damages for the misfeasance of your third party hiring agency. I am tempted to repeat this (but I won’t) simply because there is a widespread belief that using a hiring agency eliminates any legal responsibility for the workers employed. This is just flat out wrong.
  5. If you are going to use workers from a third party hiring agency, you should make sure that you have a good contract with that third party hiring agency and that the third party hiring agency you use has a good contract with those who will be working for you.

 

Categories: Chinese IP

Quick Question Friday, China Law Answers, Part XXVII: Can You Recommend a _____ in China?

China Law Blog - Fri, 07/15/2016 - 17:22

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.

I had no idea what question to use for today but the following email (modified slightly to delete anything that might enable tracking) from this morning solved that problem for me:

I am _________ from _______, consulting company located in Spain. First of all, thank you for the informative blog posts. They have been very helpful.

My client company is a high-tech manufacturer (digital __________) and tries to expand the market to China.

Is it possible for you to recommend me some China distributors who supply to Department Stores and Home Convenient Stores?

Best Regards.

My response to these emails is usually somewhat along the following lines:

I’m sorry but because we represent a number of similar companies who have paid us tens of thousands of dollars over the years I just can’t. I do not think it would be fair for me to take what we have learned from getting paid to represent these companies and then turn around and give that information for free to one of their competitors. I hope and trust you will understand.

There you have it. Your thoughts?

Categories: Chinese IP

Classic China Scam: Come to China to Sign The Contract

China Law Blog - Thu, 07/14/2016 - 09:45

We long ago instituted the rule that if we got three blog comments and/or emails on a subject in a week, we would write about it. We have received three emails and one comment from people about to get scammed by a classic (but obviously resurgent) China scam. The below blog comment came in today:

So pleased to have found this blog. I have been contacted recently by this company from Kunming asking that I fly to Kunming to sign the Official contract. They were proposing that we organise a 20 day tour of France for 89 retired military veterans. We had provisionally booked the hotels and reserved the coaches so had spent quite a lot of man hours on the project.

After sending me the official contract they then asked me to pay my own expenses to China in order to meet them to sign the official contract in person before they would release 30% deposit into our bank account.

This does not normally happen in our Industry so a Chinese colleague phoned the companies that were on the contract and nobody from either the Kunming Tourist Board or the Government Department for retired veterans new who the man was that had signed the contract.

So that’s when I did a bit more research and found this Blog. Halleluya, great to get closure.

BEWARE OF “CON-MING”

This scam has been around forever and yet Western companies are still falling for it. It though seems to be rapidly accelerating of late, which is absolutely par for the course whenever China’s economy starts slowly, which it has been of late.

The scam consists of the Chinese company (actually, in every instance when our firm has done any investigation at all we immediately learned that there is actually no real company there) luring in the Western company with promises of big money for services (or sometimes products) to be supplied by the Western company. There is just one small hitch: the Western company must go to China (near as I can remember, it’s always some third or fourth tier city in China, never Beijing or Shanghai or Shenzhen, or even Tianjin or Qingdao) to sign the contract.

Why must the Western company go to China to sign a contract when China deals constantly get done without an in-person signing ceremony? The following are the reasons typically provided:

  1. Chinese custom. It would be rude if you don’t come. Note that of the thousands of contracts in which my firm’s China lawyers have been involved, less than ten percent have involved an in-person signing.
  2. We need to do this in front of Chinese government officials, for one reason or another. Note that I can recall only two instances where our contracts were signed in front of government officials and those didn’t need to be. They just were because the transactions were so large and so vital to the local economy and doing so was a way of improving government relations going forward.
  3. The contracts need to be notarized by a Chinese notary and for that they need to be signed in front of a Chinese notary. Complete lie.

Why does the Chinese company want the Western company to go to China? How does the Chinese company possible benefit from this? Based on the Western companies that report back to us after they have been scammed, the following are the most common:

  1. Western company personnel will be put up in a local hotel for 4-5 days and the bill will be maybe ten times what it should have been. The hotel and the scammers then split the take. This is not to mention the multiple celebratory banquets that also are grossly over-billed.
  2. The fake notary charges a percentage of the deal, typically USD$8,000 to $15,000. The Western company believes it must pay this for the deal to go through.
  3. The Western company is subtly told that for the deal to go through, government officials must be paid and it is legal for a foreign company to pay them. Complete lie. If these were really government officials and you do really pay them, you are risking jail time in both China and most likely in your home country as well.
  4. Some third party is necessary for the deal for some reason and the Western company must pay that third party. Really?

For more on this particular scam, check out the following:

How do you prevent this scam from happening to you? Easy. You conduct basic due diligence on the Chinese company before you get on the airplane. Long before. The first thing you do is determine whether your China counter-party even exists as a registered China company or not. And when you discover that it doesn’t, you end all communications.

You have been warned. Again.

Categories: Chinese IP

China Manufacturing Contracts, Part 3: An Original Development Manufacturing Agreement that Works

China Law Blog - Wed, 07/13/2016 - 08:58

This is the third in my series on China manufacturing contracts. Part one was on the three main types of China manufacturing arrangements we are seeing these days: Original Equipment Manufacturing (OEM), Contract Manufacturing (CM) and Original Development Manufacturing (ODM). Part two focused on ODM contracts, which ten years ago were relatively uncommon (back then many of our clients were making clothing or toys or very basic electronics), but now make up well over fifty percent of the manufacturing contracts seen by our China lawyers — largely complicated hardware, internet of things (IoT) devices, and industrial equipment.

This post focuses on the intellectual property (IP) issues surrounding who owns what in a ODM arrangement and on the need for that ownership to be clear before any relationship between the foreign (usually American, European, or Australian) buyer and the Chinese factory company begins. I concluded

The technical question of percentage ownership is critically important for our clients because it determines the answer to a second, oftentimes even more important question: if you as the foreign buyer decide to or need to move your product production to a different factory, can you do it? Yes or no? If you own 100% of the IP, you can move. And if you have a contract that makes this clear and penalizes your existing factory for not allowing you to do so smoothly, you almost certainly will be able to do so without incident. However, if your China factory owns some or all of the IP, then you will not be able to switch your production to a new factory without some sort of license or permission from the factory. This is an issue that you need to resolve at the outset and you should not assume that you already know what the factory will say. Often, the response of the China factory is quite surprising to the foreign buyer.

In our recent experience, the most common position taken by Chinese factories is as follows:

  1. The foreign customer owns the exterior design (design patent) for the product. The customer owns its trademarks and logos.
  1. The Chinese factory owns the core intellectual property for the product.
  1. The Chinese factory agrees to manufacture the product for the customer on an exclusive basis. However, the manufacturer is free to continue to make use of its core intellectual property, including any “new work” developed as part of the product design process, in manufacturing for itself and in manufacturing products for other customers. This includes the Chinese factory manufacturing products that will directly compete with the foreign buyer’s product. The only limitation on the Chinese factory is that it cannot employ its IP to manufacture a product that uses the exterior design, trademark or logo of the foreign customer.
  1. The foreign customer cannot take the product and have it made by any other factory. That is, the customer is stuck with the Chinese factory, no matter what happens.

Assume the factory takes the “you cannot go anywhere else” approach. Then you will have to consider critical issues that will arise at the production stage. Specifically, you will need to consider what will happen in the following common situations:

  1. The Chinese factory raises its price to an unacceptable level.
  1. The Chinese factory cannot meet your quantity or time of delivery requirements.
  1. The quality of the product is not acceptable. There are consistently too many defects.
  1. The Chinese factory just decides to stop manufacturing for you. This can be because it simply decides to quit, or this can be because it decides to manufacture a similar product for themselves or for a larger company that can generate larger and more consistent orders.

All the above happens all the time when working with Chinese factories in China in the OEM and CM settings. In those settings, the remedy is to move to a different factory. The alternative to move is the primary threat that keeps the Chinese factory under control. Now consider the situation where you cannot move your production to a different Chinese factory. This obviously puts you in a very difficult situation. You are at the mercy of the factory. This is a situation you must avoid. For more on why it is so important to avoid this sort of situation, check out, China and The Internet of Things and How to Destroy Your Own Company, where we talk about companies that have come to our law firm too late.

The standard international standard for dealing with these intellectual property manufacturing issues is as follows:

  1. The factory is required to make the product for you for so long as you are interested in the product. If the factory determines on its own to quit making the product for you, then the factory must provide you with a royalty free license to the technology solely for the purpose of your being able to manufacture the product in a different factory. If the factory wants to avoid this result, its solution is simple: it must continue to manufacture the product for the foreign buyer.
  1. The factory is locked into a specific price for a specific period. Assuming that the production arrangement will be long term, it is probable there will be valid reasons for raising or lowering the price. For example, exchange rate fluctuation can be a good reason to go in either direction with the price. To provide for reasonable price changes, your contract should provide for a mechanism for annual price adjustments. This mechanism can range from a simple index to the CPI to a complex formula that takes into account multiple factors.
  1. There are two primary mechanisms for dealing with the quantity/time issue. The first is to develop a production schedule that binds both parties. The second is to provide for the situation when the factory is unable to meet the foreign buyer’s requirements by contractually requiring the factory to license production at an alternative location, but only in the amounts required to meet the excess requirements.
  1. Your manufacturing contract should provide for the situation where the factory consistently violates quality standards by giving you — the foreign buyer — the right to terminate the manufacturing contract for breach. The foreign buyer may have other reasons to terminate the contract for breach by the factory. Your contract should state that if it is terminated because of a breach by the factory, the factory automatically licenses you to manufacture your product in a different factory. Some Chinese factories will claim this rule allows for breach in bad faith simply for the purpose of moving to a new factory. If this is a genuine concern, the agreement should provide for a method of arbitration focused solely on this issue.

Though the above provisions are both fair and standard in the international business of custom design and manufacturing, we find that many Chinese manufacturers either refuse to discuss these matters or refuse to accept a reasonable solution. The Chinese factory knows that its customer will be stuck and stuck is exactly where it wants its foreign buyer to be. Being stuck with a factory what behaves unreasonably is a very unpleasant experience. You should consider carefully whether you want to proceed in that kind of situation.

You do not want to be ambushed by these critical issues after you have spent considerable time and money in developing a product with a factory that will then hold you hostage at the production stage. See China and The Internet of Things and How to Destroy Your Own Company for a taste of what this can look like.

You need to get clear on these design and manufacturing and pricing and production and intellectual property issues from the start; that means you need an ODM agreement that sets forth how they will be resolved.

Categories: Chinese IP

China Manufacturing Contracts, Part 2: ODM Arrangements

China Law Blog - Tue, 07/12/2016 - 09:09

 

As I mentioned in my first post of this series on China manufacturing contracts, Original Development Manufacturing (ODM) has become very common in China. Shenzhen in particular has become the “go to” location for start-up companies with an innovative product concept but no manufacturing facility. For low volume production of hardware and internet of things (IoT) products, China has become virtually the sole source for production.

The most common form of ODM for foreign start-ups in China is some form of co-development. This is a major change from the former standard practice in Asia. In the old days, U.S. entities went to Taiwan, Hong Kong, Japan or Korea for their development work. Under that model, the foreign entity paid for the development and the final product was delivered to the foreign entity as a deliverable with no strings attached. The ownership of IP was clear: the foreign entity paid the fee and the foreign entity had 100% ownership of the product.

With the co-development approach that is now almost universal in China, the approach is quite different.  There are two basic types of co-development in China. In the “new product” approach, a foreign entity approaches a Chinese factory with an idea for a new product. However, the foreign entity usually has just the bare outline for the new product: often no more than simple drawings and a specification sheet. The Chinese factory is then asked to develop that product with the often unstated assumption that the factory will manufacture the product when development is complete. In the “add-on approach”, the factory already has its own proprietary technology. The foreign entity then engages the Chinese factory to produce a new product based on the core technology owned by the factory.

The issue our China lawyers keep encountering is that the legal consciousness of all the parties to these transactions is stuck in the old model of straight development for a fee. But the issues that arise under the new, co-development model are quite different from the former “straight” development model. The purpose of this post is to set out in a preliminary way the basics on what a foreign entity must consider when engaging in co-development in China.

None of the issues are easy to resolve, and the alternatives are very complex. Because of the difficulty, many foreign entities seek to hide their head in the sand and just ignore the issues. This is a mistake. It makes no sense to go to all the trouble of developing your product if, in the end, someone else (the Chinese factory) either owns the rights to “your” product or monopolizes the right to manufacture it.

The basic issues to consider in a Chinese co-development project are as follows:

1. Will the Chinese side do the development work at its own expense or will you pay for the development work? This is the critical first decision. Note that if the Chinese side does it at its own expense, you have very little ability to control the development process. There are several ways Chinese companies deal with this issue.

  • Some Chinese companies will do the development work at their own cost on the assumption that you are required to use them for manufacturing.
  • Some Chinese companies will pay the development costs up front, but then charge them back to you by applying some sort of fee to your initial purchases. Again, this assumes you are required to use them for manufacturing.
  • Some Chinese companies will charge a fee for the development work. Often this is a partial fee, and the Chinese company will charge the remainder to you by applying some sort of fee to your purchases. For example, if the total development cost is around $150,000, the Chinese factory will charge you a $50,000 upfront fee and then amortize the remaining $100,000 over a two year period. If you do not repay the entire amount during this period, the Chinese factory will then expect you to pay the remainder in a lump sum at the end of the two year period.

Note that all of these alternatives assume the foreign buyer is required to use the Chinese factory to manufacture the product.

2. What is the time schedule for the product development work? What happens if, as is normal, the Chinese side fails to meet the time schedule? This issue should not be underestimated. In our experience, the Chinese factory almost never completes production within the required time period. It also is not uncommon for the Chinese factory to never succeed in developing an acceptable product.

3. What is the final price goal for the product? If the Chinese side succeeds in making a workable product, but the price is triple what you need to viably sell it, that does not constitute success. Sometimes the higher price is because the Chinese factory was unrealistic in its initial estimate or it accepted an unrealistic price from the foreign buyer just to keep the work away from a competitor. In other cases, the Chinese factory will intentionally set the price absurdly high simply to drive away the foreign buyer so it can make the product for itself.

4. What exactly are the “deliverables” and what is the process for determining whether the deliverables meet your goals? Often the “deliverable” is no more than a working prototype. However, a single prototype cannot be considered the property of the foreign buyer. So when a prototype is the sole deliverable, the foreign buyer has in fact acquired nothing of value other than perhaps a commitment by the Chinese factory to manufacture consistent with that prototype.

5. Molds and tooling are usually of critical importance in developing a new product. With respect to your molds, you need to consider the following: Who will arrange to design and manufacture the molds and tooling? Who will pay for the molds and tooling and on what schedule? Who owns the molds and tooling? If you want to move the molds and tooling (not the intellectual property for the product, just the molds and tooling) to a new factory, do you have the right to do that? Often Chinese factories will say: yes, you can move the molds and tooling, but you have to pay a fee. In other cases, the Chinese will claim to own certain molds and tooling that are directly connected to what they believe is their proprietary IP. Deciding what fits into what category can be very complex. For how to keep your molds, check out China Manufacturing: How To Hang On To YOUR Molds

Though these five issues are normally difficult to resolve, they actually are the easy part of the process. The more difficult issue is who owns what with respect to the intellectual property in the product. Determining that the factory owns 50% and you own 50% may be relevant for allocating income from commercialization of the IP, but it does not tell you anything useful on the practical level of manufacturing the product.

In tomorrow’s post, I will discuss the intellectual property issues related to determining who actually owns what in an ODM arrangement.

 

 

Categories: Chinese IP

China Manufacturing Contracts: OEM, CM, and ODM Arrangements

China Law Blog - Mon, 07/11/2016 - 15:18

I spend much of my time drafting manufacturing agreements between foreign (mostly American, European and Australian) companies and Chinese companies. When doing these manufacturing contracts for China, my first step is determining what kind of relationship the foreign buyer (typically our client) will have with the Chinese factory. We cannot be clear about what kind of manufacturing agreement to draft until after we know what type of manufacturing relationship is intended.

To guide the process, we have found that there are three fundamental types of manufacturing arrangements used in China: Original Equipment Manufacturing (OEM), Contract Manufacturing (CM), and Original Design Manufacturing (ODM). This post is the first in a series of posts I will be writing on how these different arrangements influence the various legal issues inherent in manufacturing in China. Today’s post focuses on the intellectual property issues that can arise when having a product manufactured under each of these three arrangements in China.

Type 1: Original Equipment Manufacturing (OEM). In this arrangement, the foreign buyer purchases a product from the Chinese factory that is already being manufactured by the Chinese factory. The buyer then “packages” this product with its own trademark and logo. The buyer and the factory may also agree to certain cosmetic changes (color, shape, minor added features) that further customize the product for the buyer.

OEM manufacturing was the original standard for custom manufacturing in China. The great trade fairs such as the Canton Fair were designed to introduce standard Chinese factory products for purchase by foreign OEM customers. In the classic OEM arrangement, the ownership of the intellectual property is clear. The factory owns the IP in the product, while the buyer owns the IP in its trademarks and its logos and its packaging. That is, the buyer owns its brand but the factory owns the product.

The difficult issue in an OEM Arrangement is who owns the IP in the changes to the product that involve customization for the buyer? In terms of standard IP analysis, there is no clear answer here. One purpose of a OEM agreement is to clarify this issue. Usually, the buyer seeks to restrict the factory from making use of the customization in sales of the base product to third parties. Stated simply, the factory will usually want to make use of the customization and the buyer will want to prevent this. This can lead to difficult negotiations with no clear outcome.

 

Type 2: Contract Manufacturing (CM). In this arrangement, the foreign buyer has a fully developed product design. Traditionally, this design was of a product that had been manufactured by the buyer in its home country. More recently, the product is a new design being manufactured for the first time in China.

Contract manufacturing represents the second stage in foreign manufacturing in China. In principle, the design ownership issue is quite simple. The foreign buyer owns all of the IP: the IP in the design and the IP in the brand. The factory owns nothing. However, in actual practice, the division is not so clear. This is especially true when the factory is working with a new design that has not been manufactured previously on a commercial scale.

In this setting, the Chinese factory will often make changes in the product design during the course of “commercializing” the product. Who owns those design changes? What if the factory wants to use those design changes in modifying the factory’s own products that are sold in direct competition with the foreign buyer? What if the foreign buyer wants a different factory to make the product? Is that other factory permitted to make use of the design changes? These are difficult issues that arise in virtually every contract manufacturing project and they can be resolved only by a clear written agreement.

 

Type 3: Original Design Manufacturing (ODM). As Chinese factories have become more technically competent, foreign buyers have started entering into arrangements where the Chinese factory does some or all of the design work for the product. There are many variations on the ODM approach. For this discussion, we will consider the simplest variant where the design concept and the basic specifications are developed by the foreign buyer, while the commercial design work is done by the factory. In this most fundamental form, the foreign buyer provides drawings and a specification sheet. The Chinese factory does the rest of the work, in consultation with the buyer.

In this setting, the obvious question is who owns the design in the resulting product? In our experience, the foreign buyer will take the position that it owns the design, since it came up with the original concept and then brought that concept to the Chinese factory. However, the Chinese factory will usually take the opposite position, claiming that since the factory did all the R&D and commercialization work, the factory owns the IP in the product design. Often the Chinese factory will agree to make that product on an exclusive basis for the foreign buyer, but the foreign buyer does not have the right to have the product made by a third party factory. This position can come as a bad surprise to the foreign buyer, particularly when the factory suddenly announces it will be doubling the price for manufacturing the product.

These issues can get even more complex when the product developed incorporates or is based on technology clearly owned by the factory. In this setting, the factory will often state that the buyer can go anywhere it wants to manufacture the buyer’s own portion of the product design, but no third party factory can make use of the Chinese factory’s proprietary technology in the manufacturing process. Consider this case for a foreign buyer who has spent considerable time and effort to develop a product design only to learn after one year that the Chinese factory has decided to terminate the manufacturing agreement.

Once again, the only way to resolve this issue to to confront it in advance with a detailed written ODM agreement that sets out a resolution to these issues that is fair to both sides. There is no simple, legal default answer to any of these difficult issues. Or, rather, the legal default favors the position of the Chinese factory. Absent a clear agreement on how to proceed, the foreign buyer will lose pretty much every time.

 

As you can see, even for the most basic OEM arrangement, a simple purchase order is not sufficient. In every type of manufacturing relationship in China, a formal agreement is required. In the absence of such an agreement, the ambiguity of the situation will always favor the factory that is doing the manufacturing. So forget the POs and join the real world where clearly drafted agreements (in Chinese) are normal practice.

 

Categories: Chinese IP

China Trademarks, the Madrid System, and Star Trek

China Law Blog - Sun, 07/10/2016 - 09:13

A couple years back, I wrote a post explaining why it rarely made sense to file a trademark application in China via the Madrid System. Nothing has changed substantively since then, but a growing trend among foreign rightsholders has made the Madrid System even less relevant.

As I have written previously, the Chinese Trademark Office (CTMO) does not require trademark applicants to prove use of the mark at the time of application, or any time thereafter (unless a third party seeks to cancel the mark for non-use, which is only possible after three years). As a result, many corporations—especially multinational corporations facing an onslaught of counterfeit merchandise—have started filing applications that cover a range of goods far greater than what they are actually producing or selling. Although we don’t represent Starbucks, I like to hold them up as an example of the gold standard in “offensive” trademark registration. They have registered the word “Starbucks” in China as a trademark in all 45 classes of goods and services. Starbucks brand diapers? Covered. Starbucks brand patio furniture? Covered. Starbucks brand binoculars? Covered.

As far as I know, Starbucks has not sold and has no plans to sell branded underwear, patio furniture, or binoculars. Accordingly, it would not be able to register trademarks for such goods in the United States or most other countries in the world –and therefore could not use such registrations as the basis for a Madrid System application. In other words: the only way Starbucks, or any other company, can take advantage of the China trademark system’s unique protections would be by filing a national trademark application in China.

The only mystery to me is why more companies with the means and motivation aren’t taking advantage of the Chinese trademark system. I just did a quick search for “Star Trek” on the CTMO database—not that I’m looking forward to Star Trek Beyond or anything—and the folks at Viacom are just asking for trouble. They have registered “Star Trek” in only classes 9, 16, and 41, which means that an entrepreneurial Chinese company could soon be boldly going where no man has gone before. Star Trek vitamin supplements, anyone?

Categories: Chinese IP

Shenzhen, China, 24/7, and the Internet of Things

China Law Blog - Sat, 07/09/2016 - 09:35
Internet of Things = Shenzhen

A little more than a year ago, I did a post, entitled, Shenzhen As China’s Most Competitive City. It Just Might Be…. I wrote that post in response to the Chinese Academy of Social Sciences having just named Shenzhen as “China’s most competitive city.” I talked of how our China lawyers were seeing a shift to Shenzhen among our clients:

Five years ago, my law firm’s clients would nearly always set up their China operations in either Shanghai or Beijing. Beijing if they were in media or entertainment or software and Shanghai if they were in consumer goods or finance or pretty much everything else. Though we would occasionally get strays who would set up in Qingdao or Dalian because they were in the fishing or shipping industry or Xiamen or Xi’an because they liked those cities or knew someone there, or Shenzhen because they knew the city from having gone there so many times to oversee their product manufacturing outsourcing, certainly our bigger and more sophisticated clients were choosing Beijing or Shanghai.

But in the last few years, many of our China WFOE formation clients are requesting we set them up in Shenzhen.

I noted that our clients were giving us the following reasons for choosing Shenzhen:

1. It’s close to Hong Kong but cheaper.

2. It’s become the electronics hardware center for China, and not just for manufacturing, but for design and engineering.

3. It may not be as exciting as Shanghai or Beijing, but it’s the best place for business.

4. It is a nice place with a number of good international schools.

5. It is a lot less expensive than Shanghai or Beijing.

In just the last year since I wrote the above, Shenzhen (despite getting considerably more expensive) has almost taken over our China practice. Not so much with WFOE formations (though those for Shenzhen have increased) but with anything having to do with hardware and with the Internet of Things (IoT). At least half of our new clients in the last year are involved with Shenzhen. Some are seeking to go into Shenzhen via WFOEs, but most are working with the electronics manufacturers there and with them they are looking to manufacture, do joint ventures or technology licensing deals. If we were to subtract out our China media and entertainment work (virtually all of which takes place in Beijing) Shenzhen is without a doubt the most important city for our law practice right now.

As part of that, Steve Dickinson and I will be going to Shenzhen in late September to speak on the legal issues related to hardware and the Internet of Things. We have spoken countless times in Beijing and in Shanghai (and even in Qingdao and Dalian) but until about a year ago, never in Shenzhen, and yet we will be speaking at least twice there in September.

Of course it is not just lawyers who are taking note of Shenzhen’s increasing importance. Renaud Anjoran, on his Quality Inspection Blog, recently did a post entitled Shenzhen, the Best City in China for Manufacturing? Renaud started his post by talking of how views of Shenzhen vis–à–vis (I’m using French here as a nod to Renaud) Hong Kong have so radically changed:

Many Hong Kong people still shriver when they hear “Shenzhen”. It used to be a very poor patch of land along their border with the mainland. Unsurprisingly, Hong Kong people were seen as an easy target for some Shenzhen criminals. But things have changed a lot.

Nowadays, most Shenzhen residents are happy with their lives. When they visit Hong Kong, they wonder how people can survive in such a tiny, cramped environment, where the basic necessities of life are so expensive.

Renaud then writes about how so many tech companies are located in Shenzhen:

Recently a bunch of glowing articles about Shenzhen appeared in the Western press. They tend to focus on the long list of tech companies headquartered in Shenzhen: Huawei and ZTE (telecom equipment, phones…), Tencent (the only other internet company at Alibaba’s scale in China), DJI (drones), OnePlus (mobile phones)…

MakerBot, the famous 3D printing company, was a big advocate of “Made in USA”… until they moved production to Shenzhen!

Renaud then puts forth the following proposition: “Quite simply, the North of Shenzhen might be the best location in China, and even in Asia, for a manufacturer of complex products.”

I will raise Renaud one by saying that for most hardware and for virtually all IoT products, Shenzhen seems to have become just about the ONLY place for manufacturing in China, and, to a large extent, in the world.I cannot even think of even one of our IoT clients not tied in with Shenzhen. It’s possible such a client exists, but every single one that springs to mind is linked to Shenzhen.

As IoT continues to boom, Shenzhen no doubt will as well.

What are you seeing out there?

For more on China and the Internet of Things, check out the following:

 

Categories: Chinese IP

Quick Question Friday, China Law Answers, Part XXVI: Is This a Real China Lawyer?

China Law Blog - Fri, 07/08/2016 - 05:58

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

One of the most frequent, weirdest, and probably most insulting questions our China lawyers get is the one where we are provided a link and then asked if this is a real or a good Chinese law firm. How are we even supposed to respond to that anyway. My tactic (after having received so incredibly many of these is with something snarky like the following:

Let me get this straight. You are writing my law firm asking me to conduct free research for you and then provide you with free advice so that you can go ahead and use another law firm? Is it just me, or should I not feel entitled to tell you that we will not provide you with this service unless we are paid USD$3500 upfront.”

Needless to say, nobody has ever taken me up on this offer. But perhaps they should.

Over the years we have often written about fake Chinese law firms and the havoc they cause to real American and European and Australian companies, and probably to companies from a whole host of other countries as well. The below are two of our oldest most classic posts on the topic and two of our more recent ones:

We have many times represented companies that thought they had paid money to a Chinese law firm for something like registering a trademark in China or drafting a manufacturing agreement or forming a WFOE, only to learn that they had instead paid money somebody who had set up a temporary website with the sole intention of bilking the unwary. I have never heard of a real Chinese lawyer doing this. The trick is knowing who is a real lawyer and who is not.

Anyway, I thought about these fake law firms this week because I both heard from someone who had paid someone (I presume a fake lawyer) to register a couple trademarks for them in China a few years ago and then just discovered that nothing had ever been filed and the “law firm” no longer exists and because our law firm has for the third time been “faked.” Go here to see the fake HarrisMoure law firm and go here to see our real website for our real law firm. I have already received two emails from people alerting us to the fake law firm and telling us of how the fake law firm had cheated them. I have no idea whether this fake law firm is based in China or not, but it should be lesson to all who seek out law firms on the internet to at least conduct the following basic due diligence:

1. Determine how long the law firm has been in existence. Really in existence, not just some date on its website. If it hasn’t been around for many years, you should be wary. Of course there are plenty of legitimate law firms formed just this year, but longevity is at least some proof of legitimacy.

2. Read about the law firm and its lawyers on other sites. Real law firms exist outside their websites. Does this law firm show up on court records as having represented someone? Have any of its lawyers published articles with recognized media? Are any of its lawyers listed on lawyer ranking websites? Dig deep to be sure.

3. Go ahead and call the relevant bar associations or lawyer licensing bureaus to confirm.

4. Most importantly, do not be afraid to go with your gut. Just about every time I have talked to someone who used a fake law firm they have admitted that something (oftentimes the too low pricing) made them wary even before they paid.

5. Be careful out there.

UPDATE: Cannot resist adding this piece regarding a fake Qing-Era Mansion.

 

Categories: Chinese IP

China Deals: The Three Basic Rules for Joint Ventures, Product Manufacturing, Distribution or Otherwise

China Law Blog - Thu, 07/07/2016 - 08:51
China joint ventures. When in doubt, don’t.

Many of our foreign company clients (usually North American, European or Australian) have their product made in China under a contract manufacturing arrangement with a Chinese manufacturer. At the start of this relationship, the foreign company’s goal is to sell its product in the North American and European markets. But as China continues to get wealthier and more sophisticated, it often happens that a Chinese company approaches the foreign company about selling the foreign company’s product in China to Chinese customers.

When the foreign company investigates the situation, it quickly discovers that selling its product into China will be considerably more complex than initially seems. Since the foreign company does not own the product until after it is shipped outside of China, selling the product within China will necessarily involve a complex process of exporting out of China and then selling back into China. This results in potentially having to pay VAT twice: once on the export and again on the import. As a result of this, foreign buyers of contract manufactured product will often be approached by a Chinese company with elaborate schemes designed to avoid such taxation.

Such schemes should almost always be avoided.

The Chinese company often will try to convince the foreign company to enter into a complex “partnership” or joint venture that will “allow” the foreign company to participate in the product distribution business in China. Entering into such a partnership is virtually always a mistake and the sensible foreign company should not want to have anything to do with this kind of business in China, particularly when tax avoidance and “incentives” for making sales are the major objective. For more on China Joint Ventures, check out the following:

The foreign company should instead insist on operating under the standard distribution model used throughout the world. The foreign company should purchase its product from its Chinese manufacturer, receive that product outside of China (in an export processing zone or when shipped) and then sell that product back into China to a qualified PRC distributor. The distributor can be located in China, or in a PRC export processing zone or in Hong Kong. The foreign company should set up that distribution relationship so that it earns its profit from that initial sale, freeing the foreign company from any concerns with the financial side of the Chinese operation. On the other hand, the foreign company should strictly monitor the operations of the Chinese distributor through a standard distribution agreement.

If the foreign company wishes to support its PRC distributor, it is free to offer incentives. There are many ways to do this, including by a) not charging the Chinese distributer for product that will be used as samples, b) giving the Chinese distributer reduced pricing for a certain number of products, and/or c) providing the Chinese distributer with cash incentive payments for advertising, for seminars and/or to partially or completely cover the cost of government registrations. However, such incentives should be offered to a distributor operating under a standard distribution agreement that allows the foreign company to terminate the agreement if the distributor does not perform (which is common), that allows the foreign company  the absolute right to audit the distributer’s performance, and that allows the foreign company to immediately terminate the Chinese distributor if it engages in irregular conduct such as bribery or kick backs (which is common). One major defect in any kind of partnership/joint venture approach is that it is difficult to hold the Chinese side to a tight performance standard when there is a business ownership relationship. It is like a marriage: easy to get into, but hard to get out of.

Due to the need to export product from China and then import it back into China, the distributor often will establish an entity in Hong Kong to handle these operations. The foreign company can take an ownership interest in the Hong Kong distributor, but the basic rules remain the same: 1) the Hong Kong distributor should be treated as an arms length third party, operating under a standard distribution agreement and 2) the foreign company (the North American or European or Australian company) should earn its profits from sales to the distributor — taking the profits NOW — and not from the very uncertain and tax disadvantaged distribution of profits from the distributor at some unknown inherently uncertain later date. The foreign company should understand that it is a myth that it will be able to exercise more control in a joint venture than via the above sort of distributer relationship. It is very difficult for a foreign company to control a joint venture thousands of miles away and with no right to make a quick and decisive contract termination decision.

It is rare for foreign companies (particularly SMEs) to want to get intensely involved in the business of product distribution in a vast and complex market like the PRC. This is why major multi-nationals often contract with Chinese distributors to do the work. It is virtually unheard of for foreign SMEs that understand the issues to even consider taking on this difficult burden. But inexperienced SMEs and start-up companies seem constantly to get approached with this kind of ill-conceived concept, for obvious reasons.

If you are having your product made in China (or even outside China) and you are approached with a proposal to “joint venture” on selling your product into China, the first thing you should do is apply the following three basic rules that apply to any project concerning China:

  1. If the proposal is complex, don’t do it. You should be able to understand every word of the proposal in a first reading.
  1. If the proposal involves an equity joint venture business, don’t do it. Do not get into any business relationship with an entity in China that you cannot terminate by a simple contract termination notice.
  1. If the proposal is not supported with a detailed set of financial projections, don’t do it. A “business plan” full of fluff and fancy jargon that no one really understands does not count. You need a standard set of financial projections (hard numbers, not jargon) with each assumption clearly spelled out and supported with facts.

Just follow these three rules and you will save yourself time and money in dealing with projects in China.

For more on China joint ventures, check out Joint Venture Jeopardy (WSJ) and Avoiding Mistakes in China Joint Ventures (AmCham) and for more on China distributer relationships and distribution agreements, check out the following:

Categories: Chinese IP

Chinese Company Won’t Wire You Money Part III: Don’t Blame the Chinese Company.

China Law Blog - Wed, 07/06/2016 - 05:58

This is the third in a series of posts about getting paid by a Chinese company. In Have the Rules Changed? I looked briefly at the underlying framework of rules that apply to foreign conversions and remittances. Is there a PRC Tax Problem? dealt with some of the tax-related issues that cause payment delays or defaults. In this third post I look at some basic due diligence that can identify or avoid defaults or delays in money transfers out of China.

If you don’t get paid, ask yourself these questions before you rush to blame the Chinese company:

1. Do you have any idea what taxes should have been paid by the Chinese company and what taxes should be deducted from the remittance itself?

2. Was your contract exempt from the kind of prior registrations required by the tax authorities?

3. Do you even have an enforceable contract against the Chinese company in China?

4. Has an independent person gone down to the Chinese company’s bank branch to confirm what their particular requirements and concerns are?

5. Did you withhold any deliverables until you received all or substantially all of the money out of China?

6. Did you ask the Chinese company to provide examples of previous successful foreign remittances?

7. Does the business license of the Chinese company allow for foreign trade and thereby indicate that foreign remittances would not be unusual in the ordinary course of business?

8. If you’re dealing with a State Owned Entity (SOE), or a very large company of any kind, did you understand all of the internal approvals that company would require before a payment could be authorized and did you appreciate how long this might take?

If the answer to any one of these questions is “no”, don’t blame the Chinese company.

Categories: Chinese IP

China Trademarks: Customs Helps Those Who Help Themselves

China Law Blog - Tue, 07/05/2016 - 07:32

A few weeks back, China Customs released its IP protection statistics for 2015. The data revealed a number of interesting trends, many of which were summarized in Mark Cohen’s China IPR Blog. I’d like to focus on two in particular.

1. Trademark infringements made up 98% of the items seized, with copyright and patent infringements combined accounting for the remaining 2% of seizures.

A simplistic (and incorrect) interpretation of this statistic would suggest that trademark infringement is a far bigger problem than copyright and patent infringement. In fact, the reason for the disparity is that it’s relatively easy for a customs inspector to tell if a product is violating a trademark based on a quick visual inspection – and almost impossible to tell if a product is violating a copyright or trademark. This does not mean that copyright and patent holders should throw up their hands and give up; it just means they should pursue other avenues. For copyright holders (especially owners of movies, television programs, recorded music, and books), it largely means pursuing download sites and the service providers that host them. For patent holders, it means filing lawsuits in China and/or the US, and pursuing 337 actions in the US.

2. Of the items seized by Chinese Customs, the vast majority (98%) were seized based on a tip given to China Customs by the rightful IP rightsholder. In 2014, the percentage of goods seized due to such a tip was 65%.

Put together, these statistics strongly suggest one or both of the following: (1) IP rightsholders are actively engaged in pursuing infringers and (2) customs officials are kept busy enough with tips from IP rightsholders that they don’t have time to conduct many inspections on their own. (Chinese Customs inspects goods either on its own authority or based on a specific request from an IP rightsholder.) Either way, even if counterfeit product bearing your trademark is being regularly shipped from China, there’s only a miniscule chance it will be stopped at customs if you aren’t being proactive. What does it mean to be proactive? First, register your trademarks in China. Second, register those trademarks with Chinese Customs. Third, track the counterfeit product, which these days mostly leaves China via e-commerce. At the very least, you need to have a handle on what’s being sold on Alibaba, Taobao, JD.com, and other key Chinese e-commerce sites. Once you understand who is selling your goods and where the goods are coming from, you can start to engage customs.

For trademark owners, customs seizures can be a valuable part of an anti-infringement strategy. But don’t expect much help from the customs authorities if you can’t be bothered to help yourself.

Categories: Chinese IP

Starting Your China Online Website. No Don’t

China Law Blog - Thu, 06/30/2016 - 08:53
http://bit.ly/29510fC by Psyche-Clops

I alone must get some version of the following email (the below is a quick conglomeration of two that I received just this morning!) at least once a week, not to mention the other China lawyers in my firm:

My name is Norberto and I am from Spain. I have a question regarding China tax law because I am planning to start a company that will target the Chinese market.

We will be starting an online platform that targets learners and teachers in China. The platform will facilitate classes (language, math, etc.) between Chinese teachers and students and our company will take a fee for the intermediary services we provide. Students will pay our company and we keep a commission from that and remit the rest to the teacher.

What regulations apply to us paying these teachers? Will we be classified as paying “salaries” and therefore have tax liability or will all the tax responsibility be on the teachers themselves? Is there a minimum sum people can earn in China without our having to provide any information to the Chinese tax authorities?

Our plan is to have our company based outside of China initially, but then move into China once things start rolling.

My response (which I actually just now set as a one-click signature in my outlook account) is typically something like the following:

If China learns what you are doing (and it no doubt eventually will) its tax authorities will come after your company (and maybe you as well) for both company income taxes on the income you are generating from your doing business within China (probably around 25%) and for employer taxes and employer benefit payments on everyone you are using within China (probably around 40%), plus interest, plus penalties. Your company will also be at risk of being sued by the people it uses in China for various employment violations, including not having written employment contracts, not providing vacation time, etc.

My strongest advice for you if you do what you are planning to do is that you and anybody else identified with your company never go to China because the Chinese authorities like nothing more than to hold people until they pay all taxes, with interest and penalties. I suggest you read this article I wrote last year for Forbes Magazine, entitled, China’s Tax Authorities Want You, It details how China is really stepping up its efforts against companies that hire employees in China and/or do business in China without registering a company in China and paying their China taxes. Since I wrote this article (due in large part to its declining economy) China has only accelerated its efforts to track down and tax and penalize companies that do what you are proposing to do.

Categories: Chinese IP

Import Sensitive China Products: Importer Beware

China Law Blog - Thu, 06/30/2016 - 05:58

Over the last several years, many US importers have called me after learning that they are facing liability for antidumping and countervailing duties on a number of different products. These duties can be in the millions of dollars, even though the importers simply did not know that the products they were importing were covered by US antidumping and countervailing duty orders. Far too few companies realize that they can be held liable for duties for importing products into the United States.

This post highlights the breadth of products currently subject to antidumping and countervailing duty orders and it thus should serve as a warning to anyone in the United States who imports those products.

If you were an importer of solar rechargers for RV units are you aware that your product is covered by the US antidumping order on solar cells from China? If you were importing curtain walls/the sides of buildings, auto parts, geodesic domes, and lighting equipment, do you know that all of those products were covered by US antidumping and countervailing duty orders against aluminum extrusions?

The US presently has more than 130 antidumping and countervailing duty orders against China and hundreds of additional such orders against imports from other countries. The orders against Chinese products block more than $30 billion in imports and they can stay in place for 5 to 30 years. The orders can also expand to cover downstream products, such as curtain walls, solar cell consumer products, and gardening equipment.

With regards to China, more than 80 of the antidumping and countervailing duty orders are against raw materials, chemicals, metals and various steel products, used in downstream US production. In the Steel area, there are orders against the following Chinese steel products: carbon steel plate, hot rolled carbon steel flat products, circular welded and seamless carbon quality steel pipe, rectangular pipe and tube, circular welded austenitic stainless pressure pipe, steel threaded rod, oil country tubular goods, steel wire strand and wire, high pressure steel cylinders, non-oriented electrical steel, and carbon and certain alloy steel wire rod.

There are ongoing investigations against cold-rolled steel and corrosion resistant/galvanized steel so almost all Chinese steel products from China are blocked by US antidumping and countervailing duty orders.

In addition to steel, other metal products, such as silicomanganese, metallurgical coke, magnesium, silicon metal, and graphite electrodes, which are used in downstream steel production, are also blocked by antidumping orders. Electrolytic Manganese Dioxide used to produce batteries is also covered, which led Panasonic to close its US battery factory and move to China. The Magnesium orders have led to the destruction of the US Magnesium Dye Casting industry and to the movement of light weight auto parts production to Canada.

In addition to steel and metal products, chemicals products, such as sulfanilic acid, polyvinyl alcohol, barium carbonate, potassium permanganate, activated carbon, glycine, isocyanurates/swimming pool chemicals, xanthan gum, citric acid, and calcium hypochlorite, are covered by orders. The antidumping order on sulfanilic acid led to the injury of the US optical brightening industry, which brought its own antidumping case against China.

In addition to raw materials, many household products are covered by antidumping and countervailing duty orders as well, including ironing tables, steel sinks, wood flooring, wooden bedroom furniture, steel shelving, and steel cooking ware. Other consumer products covered are: tires, hand trucks, lawn groomers, steel nails, paper clips, pencils, ribbons, paper products, gift wrap and heavy forged hand tools.

Food products, such as shrimp, honey, crawfish and garlic, are also covered by antidumping orders against China and other countries.

At this point, any product being imported from China is at least somewhat import sensitive and thus is at some risk of being attacked by US trade actions. This means that you as an importer should monitor the products you import for any potential trade sanctions. And if you should be hit with sanctions, know that you can request an antidumping or countervailing duty review investigation to get the rates reduced and with that your own liability for past imports.

Categories: Chinese IP

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