Chinese IP

China Solar Cells: The Fate of the Trade Universe is in President Trump’s Hands

China Law Blog - 15 hours 23 min ago

 

“Logic clearly dictates that the needs of the many outweigh the needs of the few.”  Spock, from the Wrath of Khan.

In most trade cases, a few domestic producers (or even one) ask the U.S. government to protect them by imposing extra duties or other trade barriers on imports. Usually, larger numbers of U.S. importers, downstream manufacturers or consumers wind up bearing these costs to protect the domestic producers, even though these costs are often arbitrary, excessive and unfair.

The U.S. International Trade Commission (ITC) just wrapped up its part in the latest trade case against imported solar cells and modules. Solar products from China were already hit with antidumping and countervailing (AD/CVD) duties in 2011 and 2014. This was not enough for the two largest remaining U.S. solar producers, Suniva, Inc. and SolarWorld Americas, Inc., who now have asked for a safeguard investigation to determine whether extra tariffs, quotas, and/or floor prices should be imposed on all imported solar cells and modules from any country. Opposing Suniva and SolarWorld is the rest of the $29 billion U.S. solar industry, mainly the U.S. solar energy developers, downstream U.S. solar panel installers and U.S. manufacturers of solar components, such as racking systems and inverters. On the one hand, Suniva and SolarWorld are hoping the safeguard relief measures will save hundreds of workers at their facilities. On the other hand, opponents argue these remedial measures would threaten many thousands of workers at other U.S. companies that have benefitted from the solar energy boom.

Though Suniva blames import competition for its bankrupt condition and its need for this safeguard action, the reality is that Suniva filed this case because it got whacked by the second solar trade case filed by SolarWorld. Previously, Suniva’s business model relied on producing solar cells in the United States that it then shipped to China where they were assembled into solar panels that were shipped back to Suniva’s U.S. customers.

The second solar trade case brought by SolarWorld in 2014, however, targeted any Chinese solar panels, regardless of where the solar cells were made. SolarWorld had complained that the first solar case in 2011 had an enormous loophole because it covered only Chinese solar panels made with Chinese solar cells. After that first case, Chinese module makers quickly switched to use cells from third-countries, mainly Taiwan, which caused SolarWorld to file its second case. Suniva in the second case claimed that any Chinese modules that used its American solar cells should be exempt from AD/CVD duties just because they were American, but the Department of Commerce (DOC) disagreed. The second round of solar duties disrupted Suniva’s supply chain and made using its Chinese module assemblers cost prohibitive. Suniva thus decided its last hope was to file a safeguard action that would artificially create a level playing field whereby all imported solar panels would be subject to the same high duties, quotas or floor prices.

The problem is how high do those trade barriers have to be for Suniva and SolarWorld to have any chance of surviving?

In this ITC safeguard investigation, Suniva and SolarWorld originally asked for extra tariffs to be imposed for four years, starting at 40 cents per watt on imported solar cells and a minimum price floor of 78 cents per watt for solar modules, as well as proposed import quotas to limit the total amount of imported cells (0.22 gigawatts) and modules (5.7 gigawatts). Solar industry analysts feared these measures would at least double the current cost of solar products, slash solar demand by two-thirds, and undermine billions of dollars of pending solar investment projects.

The ITC just released three different remedy packages that recommend far less than what Suniva and SolarWorld requested. The highest of the Commission proposals calls for extra tariffs of 30 to 35 percent on solar modules and cells that would then decrease certain percentage points each year for four years. Given the current forecasts that imported panels would cost around 32 cents per watt, analysts expect the highest Commission proposed remedies would add only an extra cost of 10 to 14 cents per watt.

Suniva and SolarWorld have expressed disappointment with the ITC recommendations and they have asked President Trump to impose stronger measures they claim are necessary to save the domestic U.S. solar manufacturing industry from extinction.

Unlike the more common AD/CVD cases in which the ITC and the DOC decide on whether to impose extra duties, in these rarely used safeguard investigations, the President has the ultimate authority to decide what, if any, remedial measures should be imposed. President Trump will have until January 12, 2018, to decide what remedial measures will be imposed that may affect $8.3 billion of imported solar cells and panels. He can follow any of the Commission’s recommendations or come up with his own remedial measures.

There have been few U.S. safeguard actions (and none since 2001). One reason why safeguard actions fell out of favor was because domestic industries found them less effective than the more commonly used AD/CVD actions. Because safeguard actions permit trade restrictions to be imposed on fairly traded imports, U.S. law specifically limits safeguard measures to a shorter period (usually four years or less) and to a maximum tariff rate of not more than 50% above existing rates.

Most importantly, the safeguard statute gives the President discretion to weigh the costs and benefits of imposing remedial measures. From 1975 to 2001, U.S. Presidents have declined to implement any trade restrictions in slightly more than half of the cases (19 of 40) in which they could have. In those cases where the President did impose trade barriers, they were usually much lighter than what the petitioning domestic industry sought. Past Presidents chose to impose no or much lighter safeguard remedies because they acknowledged the potentially harmful impact the proposed tariffs or quotas might have on downstream users and consumers, as well as the risk of other countries retaliating by imposing their own safeguard measures against U.S. exports to those countries.

But since President Trump has vowed to take strong action against imports, this solar safeguard action (along with another safeguard action on washing machines) is being watched closely as a test of whether President Trump’s actions will match his tough campaign rhetoric. If President Trump imposes remedial measures tougher than what the Commission recommends, we could see a flood of other safeguard petitions from other U.S. industries seeking a quick direct route to import relief from a sympathetic President.

In 2015-16, solar energy-related companies employed 374,000 people in the U.S., which is more than the combined number of workers in the coal, oil, and gas industries. Technological advances and competition have pushed solar installation costs down more the 60 percent since 2011 and solar electricity has in some places become cost competitive with electricity sourced from oil, coal, and gas. If President Trump imposes excessive safeguard remedies he could wipe out all progress solar energy has made in the United States. For the U.S. solar industry to live long and prosper President Trump will need to balance the needs of the many and not just consider the needs of the few.

Here is hoping the President makes a logical choice because a lot is going to be riding on it.

Categories: Chinese IP

China E-Commerce: Get Rich Quick by Following the Chinese Government’s Plan

China Law Blog - Thu, 11/16/2017 - 08:14


Earlier this week, in China E-Commerce: Resistance is Futile, we set out what will likely be the new rules for foreign.

I could not have scripted better responses to that post as I personally received emails from what I would describe as “both ends of the spectrum.”

The first email is from a European businessperson I know who has been doing business with China for 25+ years and living in China for at least a decade. He has become pretty cynical about China and the focus of his email was on how China is setting everything up to “screw us foreigners”: Here is his email:

Great post as usual. It nicely encapsulates what I see happening here with everything. China is re-writing its laws to make its own companies rich and to screw us foreigners.

On the flip side, I got the following email from a very experienced China lawyer essentially saying nearly the opposite:

Exactly. The intelligent way to approach China is to figure out what is their plan and then work that plan to your advantage. Fighting against the plan is futile. Working with the plan can result in a lot of money. Google decided to fight, and they are gone. Microsoft finally decided to go with the plan and they are still in the middle of the China system.

When I say these sorts of things I get accused of being too negative and I would bet you will get that reaction to this post. But I do not view it negatively at all. It outlines a clear plan to success in China. It’s just that the plan follows a basic path outlined by the PRC government and Alibaba and the other rules of the PRC Internet. There is lots of money to be made and there are many things to be done to make the deals and to protect IP and similar.

That was our exact point with the post. There are great opportunities to make money on China e-commerce but to do so you must follow China’s rules. You can complain about those rules all you like, but the real issue is whether you are going to jump in and seize the opportunity (flawed though it is) or not. What’s your answer?

Earlier this year, I attended Alibaba’s Gateway ’17. The theme of that event was that there is easy money to be made by Western companies selling their products on Tmall and on Taobao. There is most definitely a lot of money to be made but it is debatable how easy it is to make it. I don’t know about you, but I doubt that any of our long list of clients who are making money in or from China — be it via China e-commerce or otherwise — would ever claim it to have been easy. And yet, I also doubt that any of them would say that it has been so difficult as to not be worth it.

The bottom line is that selling your products to China consumers via e-commerce will not be as easy or as cheap as selling your products to U.S. or EU consumers. But is that enough to stop you? In our next post, we will talk about what you should do to protect your IP before you start selling online to China.

 

Categories: Chinese IP

How to Form a China WFOE: Choosing Your Chinese Company Name

China Law Blog - Tue, 11/14/2017 - 11:35
How to name a China WFOE

Strange but true: WFOE formations are seasonal and fall is for our law firm always the busiest time of the month for WFOE formations. Like clockwork every year, companies come to us in September and October seeking our help in getting their WFOE formed “by the end of the year.”

This plethora of WFOE formations has meant a correspondingly large number of e-mails from our China lawyers to our clients explaining the steps required to form a WFOE in China. Because these emails are helpful to anyone forming a WFOE in China or even just considering doing so, I will from time to time run some of those on here. Today’s email is about choosing a name for your WFOE.

It is necessary to select a Chinese language name for your WFOE. In choosing the name, please note the following:

1. In China, only the Chinese language name has any legal status; as a legal matter, the English is not relevant. This means you can use any English language name you want. 2. Chinese company names follow this rigid structure: [City of formation] Company Name [business type] [Company Ltd.] So, an English equivalent of a typical Chinese company name would be: Shenzhen ABC Consulting Co. Ltd. The elements in [] square brackets are fixed by the local government. This means the only thing we need determine now is the Company Name. Since as you can see, company names can get rather long, it is usually best to limit the Company Name part to 3 or 4 Chinese characters at most. 3. The company name must be different than any other company registered in your same kind of business. It is often surprising how many good names are already taken. For this reason, the local authorities require we submit AT LEAST five alternative names and they (and we) prefer ten alternatives if possible. 4. There are two approaches to selecting a Chinese company name. You can pick a descriptive name or you can pick a name that has no meaning but is intended to reproduce only the sound of the parent company name. When descriptive names are used, investors often make the mistake of choosing names that are too long. As noted above, the name should be limited to three or at most four Chinese characters. 5. You will need a native speaker of Chinese to assist you in choosing the names. Some companies simply work this out with their current staff. Some companies hire a public relations or a branding company to work with them on the issue. Note that your Chinese company name will become your identity, so a careful choice is advised. We can give you names of some branding companies with whom we have worked on China matters. 6. When you have chosen your names please submit them to us for a preliminary review. We check to see if there are any obvious conflicts with existing names and we also can give you some advice on the suitability of the names selected. We will then work with the local government to devise the full Chinese name to be used on the WFOE registration papers. We realize this WFOE naming process can be somewhat confusing and so we urge you not to hesitate to reach out to any of us for further assistance.
Categories: Chinese IP

China E-Commerce: Resistance is Futile

China Law Blog - Mon, 11/13/2017 - 05:58
China e-commerce laws

The PRC National People’s Congress last week promulgated a second discussion draft of the PRC E-Commerce Law (电子商务法草案). If you are interested in commenting, you can find the new statute and a portal for comments here.

This statute is an attempt to gain greater control over the online consumer markets. These markets have exploded in China, in a situation where there is little or no regulation. The lack of regulation has not slowed development of e-commerce in the PRC. The success of online marketing is shown by the recent results of Alibaba’s November 11 “Singles Day” online sales event. As reported by ZD Net, the results were impressive:

Alibaba Group has raked in US$25.3 billion (168.2 billion yuan) in gross merchandise volume (GMV) from its annual online shopping festival, breaking last year’s record sales by 39 percent.

Held on November 11, its Singles Day shopping bonanza this year involved more than 140,000 participating merchants, including 60,000 international brands. Some 165 of these each generated more than US$15.1 million (100 million yuan) in sales, including Gap, Nike, and Samsung, with 17 merchants exceeding US$75.4 million (500 million yuan) and six surpassing US$150.9 million (1 billion yuan) in sales.

Japan, Australia, and Germany were amongst countries with the most sales selling into China during Singles Day this year.
At its peak, Alibaba processed 256,000 transactions per second and US$1 billion (6.6 billion yuan) was processed within the first couple of minutes. In the first two hours, it registered US$11.9 billion (78.8 billion).

Overall, Alibaba processed 1.48 billion payments, up 41 percent year-on-year, and 812 million delivery orders via its logistics arm, Cainiao Network. This was 23 percent higher than last year’s 657 million delivery orders.”

As you can see, foreign products played a big part in the success of the Singles Day event. Section 5 of the Discussion Draft sets out the proposed rules for cross-border sales. The Singles Day even illustrates the way the Discussion Draft plans for the future of cross-border online sales:

1. Foreign retailers will not be permitted to directly participate in online sales in China. All online sales will be limited to Chinese owned entities that have obtained the required commercial ICP license. Though there had been some hope there would be a limited exemption to the ICP license rule for e-commerce produce sales, there is no hint of such a change in the Discussion Draft. The PRC government intends to continue restricting e-commerce sales to Chinese owned or controlled entities.

2. Foreign-owned operators of e-commerce platforms will also be excluded from operating in the Chinese market. Sales of foreign products will be forced to come into China through Chinese owned or controlled platforms.

3. The Discussion Draft provisions on cross-border e-commerce focus on ensuring cross-border sales comply with Chinese law and only approved products are imported into China and all taxes and duties on those products get paid. The Discussion Draft seeks to shut down online sales as a way to import illegal products into China and to shut down online sales as a method for evading China taxes and import duties.

4. The method for control proposed by the Discussion Draft is to create highly centralized e-commerce processing centers. The China (Hangzhou) Cross-Border E-Commerce Processing Pilot Area is an example of the ultimate goal. The idea is that these centers will handle the procedures related to e-commerce: foreign purchase, shipping to China, import into China with full compliance with all PRC applicable regulations on product approval, inspection and quarantine, payment of duties and taxes, and warehousing and distribution.

The plan is to funnel all cross-border e-commerce through a limited number of processing centers, all of which are controlled by the national government. These processing centers will also be under the control of a single e-commerce sales platform. The Hangzhou Center will be controlled by Alibaba, with competing online sales giants in China presumably establishing and controlling their own competing centers. This would be the opposite of the freewheeling approach that typifies e-commerce development in the U.S. It is though quite consistent with the current domination of retail e-commerce in the U.S. by a limited group of large players.

The success of the Alibaba event shows that the model envisioned by the Discussion Draft is already fully functioning. Foreign retail brands were excluded from direct sales. They were instead funneled through the single channel provided by Alibaba. Alibaba assumed all liability for compliance with PRC rules and regulations. No foreign entity was involved in any way with the actual direct sale of its product or with any direct relation to any Chinese consumer; all of this was handled by Alibaba.

This is the future of e-commerce in China. For foreign brand owners that want to penetrate the PRC online sales market, the Discussion Draft makes clear how the system will work.

Resistance is futile.

Categories: Chinese IP

China Law Blog on Social Media

China Law Blog - Sun, 11/12/2017 - 07:43
China Law Blog is getting “social.”

When we first started this blog we would fairly often get hundreds of comments on one post. With the changes in how so many of you actually see our posts and the importance of social media, those days are over. Or at least they have diversified.

As part of that diversification, we have ramped up what we do on social media as well. we started a China Law Blog Group on Linkedin to create a spam-free forum for China networking, information, and discussion. That group is always growing at it is now has more than 11,500 members and the number and quality of our discussions keep rising as well.

We have had some great discussions, as evidenced both by the numbers (we’ve had discussions with 50-100 comments) and on their substance. Our discussions range from the practical (“why is it so difficult to do business in China” or ”what do I need to do to get my Chinese counterparty to follow my contract) to the ethereal (“when will we know China is taking innovation seriously”).

The group has a large contingent of members who live and work and do business in China and a large contingent of members who do business with China from the United States, Australia, Canada, Europe, Africa, the Middle East and other countries in Asia. Some of our members are China lawyers, but the overwhelming majority are not. We have senior personnel (both China attorneys and executives) from large and small companies and a whole host of junior personnel as well. We have professors and we have students. These mixes help elevate, enliven, and enlighten the discussions.

What I think truly separates us from most (all?) of the other China groups on Linked, however, is how we block anything and everything that even smacks of spam. We have become so proficient at not allowing spam to see the light of day that hardly anyone even tries to sneak anything past us anymore.

If you want to learn more about doing business in China or with China, if you want to discuss China law or business, or if you want to network with others doing China law or business, I urge you to check out our China Law Blog Group on Linkedin and join up. The more people in our group, the better the discussions. Click here and join us!

Our China Law Blog Facebook page also just keeps on growing and it now has more than 19,000 likes/followers. We use that page  to go a “bit wild” because there is no massive government there to restrain us. That page deals with China law, sure, but it also deals with politics, tourism, food and fashion, business, culture, language, and just about anything else China-related. Our goal with that page is to educate and entertain. Please check out our Facebook page too, by clicking here.

And last and least, after a three-year hiatus, I went back on Twitter and I even occasionally post there as well, especially to promote our own firm’s China and international events. Click here for that.

Categories: Chinese IP

China Service of Process Under the Hague Convention and the Unauthorized Practice of Law

China Law Blog - Sat, 11/11/2017 - 06:08
Hague Service of Process in China

Just read an excellent post over at the Letters Blogatory blog. The post is entitled Service of Process and the Unauthorized Practice of Law and it is on how service of process companies so often mess this up to the detriment of their clients. It also asks whether these companies are engaging in the unauthorized practice of law and hints that they are.

The post starts out talking about the lawyer-blogger’s recent experiences with international service of process botched by service of process companies:

I have come across several cases recently where a plaintiff, or more likely the plaintiff’s lawyer, had hired a “vendor” or a contractor to serve process abroad, and where it seemed clear to me that the “vendor” had given the client bad advice or where the vendor had not done a good job effecting the service. For example, I’ve seen vendors submitting requests for service to a foreign central authority and then, after the client asks why service hasn’t been completed, informing the client that service in the country in question might take a year. The client then moved for leave to serve by alternate means, which is perhaps what the client should have done in the first place with its money. Or else I’ve seen a vendor lash out at a foreign central authority’s refusal to execute a request for service rather than try to understand the legal basis for what the foreign central authority is saying.

Ditto for the international lawyers at my firm as we too have recently seen a quasi-onslaught of bad or delayed service of process attempts on Chinese companies. We typically see these sorts of things at about year one of failed service when the client-company  turns to its lawyer and says: “it’s taken more than a year and we are nowhere in effecting service, would you please find someone who can help us on this?”

The post then starts asking questions about whether these service of process vendors may be operating outside the law by practicing law without a license: “To what extent do the things we do in international service of process constitute the practice of law? Or conversely, to what extent are the “vendors” doing things they shouldn’t be doing unless they are lawyers?”

Good theoretical questions, to which I will eventually provide a very practical “answer” below. The post then posists how the serving of process is not the practice of law when it consists of little more than going to someone’s house and handing them court papers. I 100% agree because as the post notes, this does not involve any “real legal judgment.” But as noted in the post, “the decision of what form of service to use, especially in cases of service abroad, is most certainly a decision that requires legal judgment, at least in many cases”:

Suppose you say you want to serve via the foreign central authority. There are some logistical questions about how long the process will take, what fees must be paid, etc. But there are other more significant questions for the lawyer: Will the methods of service the foreign state is likely to employ satisfy due process requirements in the US? Does the case seek the kind of relief, e.g., punitive damages, or is it the kind of dispute, e.g., a tax dispute, that will lead certain foreign states to refuse to execute the request? And if you want to use an alternate method of service permitted by the Convention, similar questions arise.

To we China lawyers, the “money” portion of the post is when it discusses a vendor who spends a long time trying to effect service, only to mention after getting paid and after having submitted the service of process request to China’s central authority how incredibly long service of process is now taking on Chinese companies. See Serving A China Company Under The Hague Service Convention: Have Fun With That where we said service takes one to five months. Those were most certainly the good old days, however, as it is taking a year or more now. There is also the very real issue in any United States case against a Chinese company as to whether the case is even worth pursuing, because so often it is not. See China Enforces United States Judgment: This Changes Pretty Much Nothing

Now for my practical answer on the unauthorized service of law question. The real issue is not so much whether these service of process companies (which are typically great for serving process domestically) are engaged in the unauthorized practice of law or not. To me the issue is whether you as a company want to entrust your multi-million dollar (or even $200,000) case to a non-lawyer to figure out the best way to effect service that complies with the Hague Convention, the requirements of the court in which your lawsuit is pending and the foreign country in which the defendant is going to be served. And if you are a domestic litigation lawyer facing these same issues, do you a year down the road want to explain why you used what is essentially a specialized messenger service to effect complicated international service? I sure wouldn’t.

Categories: Chinese IP

China Employment Laws and Your Female Employees

China Law Blog - Thu, 11/09/2017 - 01:57

China has many special laws/rules related to protecting female workers, especially those who are pregnant, nursing, or on maternity leave. For example, Chinese law generally prohibits employers from unilaterally terminating the employment contract of a pregnant or nursing employee or an employee on maternity leave. The only exception to this is that the employee may be unilaterally terminated due to the employee’s wrongdoing. Specifically, such employees can be terminated for any of the following:

  • Failing to meet relevant recruitment requirements during the probation period;
  • Materially breaching labor disciplines or the employer’s rules and regulations;
  • Committing a serious dereliction of duty or practices, such as engaging in graft or causing substantial damage to the employer;
  • Establishing an employment relationship with another employer which materially affects the completion of her tasks with the employer, or refusing to terminate such an employment relationship with the other employer after she is required to do so by the employer;
  • Has criminal liability imposed in accordance with the law.

If an employer wants to terminate a female employee but has no legally permissible ground to do so as a unilateral termination, the employer should seek to obtain agreement from the employee for a voluntary termination in exchange for severance. With a voluntary termination, the parties agree to a mutual termination with the “price” for the employee’s departure being a severance payment.

It should go without saying — but it is so important I will say it anyway, but when it comes to terminating an employment relationship with a female employee, you need to be super careful. Our policy with our clients is to err on the side of securing a mutual termination, paying severance, and getting a signed and enforceable settlement agreement, rather than risk months or years of expensive litigation.

Most foreign companies realize the difficulties inherent in terminating female employees in China (many learned this by being sued) but too few are aware of a similar need to be super careful when not renewing a female employee’s employment contract.

Consider this hypothetical: Employer and Female Employee enter into a written employment contract in year one for a 2-year fixed term. Two months before the end of year two, Female Employee provides Employer with a doctor’s note stating that she is pregnant. Employer ignores this, thinking pregnancy status is not relevant in considering whether to renew Female Employee’s contract. Employer then notifies Female Employee in writing a month before the end of year 2 (assuming this meets the specific locale’s requirement on notice of non-renewal), that her employment contract will not be renewed. Female Employee then sues Employer, demanding she be reinstated. The Chinese court will side with Female Employee and require Employer re-hire her at her old job back until her nursing period ends. When a female employee is pregnant, on maternity leave or nursing, the law prohibits an employer from ending the employment contract even when the contract term expires; it requires the employment contract be extended until the end of the nursing period.

Now, let’s consider hypothetical 2: Female Employee never provides Employer with a doctor’s note saying she is pregnant until after Employer processes Female Employee’s separation. Female Employee never raises any objections or concerns during the entire separation process, but when that process is completed, she sues and demands reinstatement because she finds out she is pregnant. Unless Female Employee has convincing evidence that she did, in fact, inform Female Employer of her pregnancy status before the expiration of her contract, Employer will likely prevail.

Hypothetical 3. Same facts as hypothetical 1, except Employer does not ignore Female Employee when she submits the doctor’s note, but rather asks her whether it is okay to proceed with not renewing her employment contract. Female Employee orally says “okay,” but immediately after her departure, she sues Employer anyway.

Employer will likely lose and have to take Female Employee back as an employee. Indeed, because so many China employment laws cannot be contracted away, even had she given written consent to Employee not renewing her employment contract, she still would have a very good chance of prevailing. So in this situation as well, the safer path is usually to enter into a mutual termination agreement with the employee and provide the employee with at least the statutory minimum severance. Going this route will usually beat a strict non-renewal with clear documentation.

Bottom line: China has high expectations for how employers must treat their female employees, especially pregnant and nursing employees and those on maternity leave and employers that fail to follow China’s particularized laws on protecting female workers tend to get burned.

 

Categories: Chinese IP

China Trademarks: Anatomy of a Chinese Name

China Law Blog - Mon, 11/06/2017 - 09:06

Labbrand, a leading Chinese brand consultancy, recently published an article discussing the naming work they’d done on behalf of Haribo, the German confectionery. (For those who don’t know, Haribo is the first and best manufacturer of gummi candies: all gummi candies in the world are derived from Haribo Gold-Bears, the ur-gummi.) I have been a huge fan of Haribo since I was a kid, and was interested to read how Labbrand had adapted Haribo’s brand names for China. I’m excerpting their descriptions below, interspersed with my own commentary.

Since 2012, Labbrand has been working closely with HARIBO to validate and create over 20 Chinese names for its brand and products, as well as for the tagline and Jingle of the Haribo brand. Chinese names 萌桃仔 [méng táo zǎi] for Peaches, 趣缤纷 [qù bīn fēn] for Supa Mix and 甜莓狂想 [tián méi kuáng xiǎng] for Berry Dream were amongst the first new releases from the brand.

The verbs in the first sentence are essential: Haribo’s Chinese brand names were not just created but also validated. Brand creation without brand protection is meaningless. As I wrote back in 2015, “If you care about your brand in China, it’s not enough just to register your English-language brand. You also need to select a Chinese name and register that as a trademark in China. Otherwise, you will forfeit not only the right to use your Chinese brand name, but the ability to choose it in the first place.” See Don’t Be Like Mike: Register Trademarks In CHINESE.

I did a quick check of the Chinese Trademark Office (CTMO) database and am happy to report that the three brand names cited above are all registered already or will be soon. (Had the results been otherwise, this would have been a short blog post!)

The three new products launched are:

Peaches, a peach flavor two-toned, sugar-dusted gummi. The Chinese name 萌桃仔 [méng táo zǎi] (cute/ peach/ young) personalizes the sweets as a cute little person by putting 仔 [zǎi] at the end. Originated from cyber language, 萌 [méng] conveys a cute and lovely feeling.

Supa Mix, a mixed collection of fruity gummies. The name 趣缤纷 [qù bīn fēn] (interesting/ colorful) brings fun and joy at the same time translating the ‘mix’ concept.

Berry Dream, a collection of berry-flavored sweets. The unique, eye-catching Chinese name 甜莓狂想 [tián méi kuáng xiǎng] (sweet/ berry/ fantasy) triggers curiosity and imagination with a good fit with product and brand attributes.

I won’t comment on the above names, except to note that they are thoughtful combinations of literal translations and characters with positive and appropriate connotations. This is the value of hiring branding professionals. Sometimes clients will come to us with a Chinese name derived from Google Translate and ask us to opine, which always brings out my inner DeForest Kelley: I’m a lawyer, not a branding specialist. Still, you don’t need to be a brand specialist to know when a machine translation goes wrong, which is often enough.

Besides the product names, Labbrand also created the Chinese tagline of HARIBO’s signature jingles – “Kids and grown-ups love it so, the happy world of HARIBO” – to help the brand better communicate with its Chinese audience. The Chinese brand tagline 大人小孩都说好, 快乐品尝哈瑞宝 [dà rén xiǎo hái dōu shuō hǎo, kuài lè pǐn cháng hā ruì bǎo]” can be translated as “grownups and kids all say it’s good, and happily enjoy HARIBO”, which is straight-forward, rhythmic, as well as easy to read and remember. The two-part structure, each ending with the same rhyming syllable [ǎo], makes the tagline melodic, attractive and unforgettable. The simple and memorable Chinese tagline stays true to the original English jingles.

I find it funny that Labbrand worked so hard to capture the rhythms and meaning of the original English tagline: “Kids and grown-ups love it so, the happy world of HARIBO.” I had always found the latter a bit stilted, and assumed it was the result of a decades-old translation from German that had over time become memorable, even cute. That’s what a phenomenally popular product can do – make the uncool cool.

Sometimes the best brands are the ones that happen by chance. Haribo was founded by Hans Riegel in Bonn, Germany in 1920, and the name Haribo is simply a portmanteau of the first two letters of HAns, RIegel, and BOnn. Now Haribo is an internationally known trademark, with registrations in multiple classes all over the world.

One final note: the official Chinese name for “Haribo” is the sound-alike “哈瑞宝” (hā ruì bǎo). Haribo has duly registered this name as a trademark in China, but they have also applied for a number of similar-sounding Chinese-language trademarks, including 嗨乐宝, 哈莱宝, and 好乐纷. Not because Haribo intends to use these marks, but because they want to prevent third party trademark squatters from doing so. Sometimes the best offense is a good defense. See “Chinese Brand Names, Copycats, and Soundalikes.”

Categories: Chinese IP

Doing Business in China is Fair to Middlin, Says the World Bank

China Law Blog - Sun, 11/05/2017 - 14:52
Doing business in China: Middle of the road

The World Bank just came out with its 312 page “Doing Business” report, ranking 190 economies on just about every measure possible. It is important to note that the rankings are based on the ease of doing business for domestic companies and not for companies seeking to do business in a foreign country.

I skimmed the methodologies the World Bank used to rank these 190 economies and I am impressed. But in the end, I have to admit that I tend to judge these sorts of rankings by looking at the countries I know to determine whether the rankings match what I see as the realities, and this World Bank ranking absolutely does.

China came in at 78th, which seems about right to me.

  • Singapore — 2nd
  • South Korea — 3rd
  • Hong Kong — 5th
  • Japan — 34th
  • Mongolia — 62nd
  • Vietnam — 68th

Singapore and Hong Kong make complete sense to me as those are indisputably two of the most pro-business countries in the world. South Korea is pretty good for foreign companies but I am surprised to see it ranked so high. Japan’s ranking makes sense to me, but Mongolia and Vietnam seem a bit high to me and I would actually rank them behind China. But my knowledge stems from representing foreign companies and perhaps those countries are different for domestic companies.

The United States ranked sixth and that seems about right. Spain, where my firm has an office, ranked 28th, and that seems about right also. Germany, where we do a lot of work, ranked 20th and that too seems right.

Here’s something in the rankings I know many of you will find amazing: China ranks 5th in the world in terms of enforcing contracts. Fifth out of 190 economies. I think that ranking is too high, but it does strongly reinforce a point we are always trying to make on this blog: contracts work in China, so long as they are drafted for a China court. See China Contracts: Make Them Enforceable or Don’t Bother.

What do you think of these rankings?

Categories: Chinese IP

Shenzhen, China, Gets Clear on Non Competes

China Law Blog - Fri, 11/03/2017 - 05:58
Shenzhen employment law

To ensure smooth implementation of the measures on handling labor disputes and to “harmonize” the interpretation and understanding of the application of laws in employment cases, the Shenzhen labor arbitration committee recently released a summary of its meeting minutes to address issues regarding adjudication of labor disputes. Their summary is intended to be a guide to district-level labor arbitration committees within Shenzhen.

A quick aside. Though Shenzhen is in Guangdong Province, you should not assume the Guangdong provincial laws automatically apply to Shenzhen because they don’t and there are in fact many differences between the employment laws of Guangdong Province and Shenzhen City. As I am constantly mentioning on this blog, China’s employment laws are very localized and this is something of which you must always be aware.

The good news for employers is that the Shenzhen labor summary includes an employer-friendly rule regarding non-compete agreements and provisions. Specifically, if an employee breaches a non-compete, the employer can demand the employee return all non-compete compensation paid to the employee during the period of breach. The employer can also demand the employee pay contract damages and require the employee to continue to perform his or her non-compete obligations. So a breach by the employee does not suspend the non-compete agreement as the employer can choose to hold the employee to the non-compete until the non-compete period expires. If the employee breaches the non-compete again, the employer can demand the employee pay contract damages for the second breach. This is not exactly new, but it makes clear that employers have multiple remedies for an employee’s breaches of a non-compete: paid compensation, specific performance, and contract damages.

Though this is all good, Shenzhen employers still must proceed with care on non-competes. First, before entering into a non-compete with an employee, the employer should consider whether the employee is even eligible to sign a non-compete under Chinese law? If the answer is no, it will not be able to enforce the non-compete. And when sued for breach, China employees almost always argue that the signed non-compete is not enforceable against them because the employer is not allowed by law to impose non-compete restrictions on them. You should be prepared to rebut this argument.

Second, you must pay your employees consideration for their not competing during the entire term of the post-termination non-compete period. You will not be able to enforce your non-compete unless you make these payments and the required payments in Shenzhen tend to be on the high side. So before you execute a non-compete agreement or provision with one of your employees, you should consider the business and financial pros and cons of doing so.

Third, for your choice of remedies to work to their fullest extent, you should include a legally enforceable contract damages provision in your non-employment agreement or your non-compete agreement.

You should be aware that if you as an employer enter an agreement with an employee regarding an employee leave where the employee will not do work for you but will still get paid, you must pay the employee during this entire period. This is because your failure to pay your employees even during such a leave will give them the right to terminate their employment contract with you on the basis of employer abuse and to demand damages for being forced to leave employment.

Categories: Chinese IP

China and the Internet of Things and What NOT to Do: A Long and Poetic Diatribe

China Law Blog - Wed, 11/01/2017 - 05:58

I had essentially the same call recently involving European IoT start-up companies that might at this point better be termed “wind-down” companies.

Their stories are an old one and one we have covered and warned about at least a dozen times on here, including in a post directed specifically at Internet of Things companies, entitled,  China and The Internet of Things and How to Destroy Your Own Company. These two companies either did not read that post or they failed to take it seriously. To make a long story short, these two companies were working with Chinese companies to produce two internet of things devices and both companies eventually succeeded. Problem is that when they did, the Chinese companies essentially told them “adios” (I am right now in the Madrid airport on my way to Lisbon for a big lawyer conference) and left these two European companies with pretty much nothing at all.

To make a long story short, these two companies were working with Chinese companies to produce IoT devices and both companies eventually succeeded with their products. Sort of. The problem is that when they wrapped up development on the IoT products, the Chinese companies with which they were working essentially told them “adios” and left these two European companies with pretty much nothing at all.

I am going to digress a bit here, so please bear with me. One of my favorite poems is called “beware:” do not read this poem, by Ishmael Reed and that poem nicely encapsulates what happened with these two European companies. Here is that poem and below that, I explain the connections. Enjoy.

tonite, thriller was
abt an ol woman , so vain she
surrounded herself w/
many mirrors it got so bad that finally she
locked herself indoors & her
whole life became the
mirrors one day the villagers broke
into her house , but she was too
swift for them . she disappeared
into a mirror each tenant who bought the house
after that , lost a loved one to
the ol woman in the mirror :
first a little girl
then a young woman
then the young woman/s husband the hunger of this poem is legendary
it has taken in many victims
back off from this poem
it has drawn in yr feet
back off from this poem
it has drawn in yr legs back off from this poem
it is a greedy mirror
you are into the poem . from
the waist down
nobody can hear you can they ?
this poem has had you up to here
belch
this poem aint got no manners
you cant call out frm this poem
relax now & go w/ this poem move & roll on to this poem
do not resist this poem
this poem has yr eyes
this poem has his head
this poem has his arms
this poem has his fingers
this poem has his fingertips this poem is the reader & the
reader this poem statistic : the us bureau of missing persons re-
ports that in 1968 over 100,000 people
disappeared leaving no solid clues
nor trace     only
a space     in the lives of their friends I cite to this poem because I am desperate to get people to stop essentially losing their companies to their Chinese counterparts and I figure listing out a full poem and then analyzing it will help people remember. I will admit to being desperate here and just plain tired of having to pass on horrible news to what once were up-and-coming start-up companies. Just as the woman in the poem gets so enamored with herself that she loses her existence, these two companies became so enamored with their technology and their work on their technology, they too lost their existence. The woman was swallowed by the poem and the European companies were swallowed by the Chinese companies with which they worked. Neither the woman nor the European companies really think about what they are doing until it is too late. Not until the Chinese company had taken the European companies figurative head, arms, fingers, and fingertips did it think about what it had done, but by that point they had essentially ceased to exist. The final paragraph of the poem describes what happens every day to tech companies that go into China unprepared and all willy-nilly. Their attempts to fuel their dreams destroy their reality. They disappear, “leaving no solid clues nor trace only a space in the lives of their friends.” Let us now return to the facts and discuss some relatively easy solutions. Both these European companies had what they saw as great ideas and they both started working with Chinese companies to realize those ideas. One company worked with its Chinese “partner” for more than a year. The other for about a year. Both companies seem to be (have been?) made up of 2-4 people who had dedicated the last year or so of their lives to getting their devices off the ground and to market. Yet right before their products became ready to launch, their Chinese factories jettisoned them and chose to go it alone with the European companies’ devices. The European companies wanted to know whether the China lawyers at my firm could help. I told them that was “both doubtful AND expensive.”

Technology companies dealing with China tend to make more and bigger mistakes than companies in other industries. The ethos of tech companies is to focus on building things (be it software or hardware or some combination of both) as quickly as possible, and not worry much about anything else. In an effort to preserve oftentimes limited funds, tech companies tend to be reluctant to spend money on anything (including legal fees) that does not directly help them develop their product and get it to market. I completely understand this, including how this usually makes sense when operating purely domestically in the United States and in Europe. But this way of doing business can and too often is disastrous when dealing with China, where it is usually impossible to “fill in” a legal foundation later.

Internet of Things companies are the new poster children for how to operate incorrectly when doing business with China.

I say this with regret because our China attorneys LOVE Internet of Things companies. We love IoT companies because we so often love and use their products and because the work we do for them is typically so cutting-edge and interesting. IoT companies looking to manufacture in China often require assistance with the following:

If you need more proof on how much our China lawyers love IoT companies, check out China and the Internet of Things: A Love Story. The best thing (for us anyway) is that just about all IoT products are being made in China — more particularly, in Shenzhen.

But back to the sad part. What is so terrible is that IoT companies seem to relinquish their intellectual property to Chinese companies more often, more wantonly, and more destructively than companies in any other industry I (or any of my firm’s other China lawyers) have seen. Ever, and by a stunningly wide margin. And the thing is, it is not as though these are big companies with a whole host of other products or IP they can turn to in a storm. No. Most of these IoT companies shrivel up and die after their IP goes “poof” in China.

In describing IoT companies and their problems to others, The following interaction, taken from at least a half-dozen real-life examples in just the last few months (and the last few months before that and the last few months before that and the last few….) should be at least somewhat instructive:

IoT Company: We just completed our Kickstarter (sometimes Indiegogo) campaign and we totally killed it and so now we are ready to get serious about protecting our IP in China.

One of our China Lawyers: Great. Where are you right now with China?

IoT Company: We have been working with a great company in Shenzhen. Together we are working on wrapping up the product and it should be ready in a few months.

China Lawyer: Okay. Do you have any sort of agreement with this Chinese company regarding your IP or production costs or anything else?

IoT Company: We have an MOU (Memorandum of Understanding) that talks about how we will cooperate. They’ve really been great. They told us they would enter into a contract with us whenever we are ready.

China Lawyer: Can you please send us the MOU? Have you talked about what your contract with the Chinese company will actually say?

IoT Company: Sure, we can send the MOU. It’s one page. We haven’t really talked much about the contract beyond the obvious and what we need to do to get the product completed.

China Lawyer: Okay, we will look at your MOU and then get back to you with our thoughts.

Then, a few days later a conversation like the following ensues:

China Lawyer: We looked at your “MOU” and we think there is a good chance a Chinese court would view that MOU as a contract. For why we say this, check out Beware Of Being Burned By The China MOU/LOI. And the Chinese language portion of the MOU (which is all a Chinese court will consider) is different from the English language portion. The Chinese language portion says that any IP the two of you develop (the IoT company and the Chinese manufacturer) belongs to the Chinese company. So as things now stand, there is a good chance the Chinese company owns your IP, at least in China. Therefore, there is no point in our writing a Product Development Agreement because your Chinese manufacturer will almost certainly not sign that.

IoT Company: I’m not worried. I think you have it wrong. I’m sure they will sign such an agreement because we orally agreed on this before we even started the project. (We get some sort of variation on this response at least 90 percent of the time).

China Lawyer: That’s fine, but I still think it makes sense for you to first make sure the Chinese company will sign a new contract making clear the IP associated with your product belongs to you, because if they won’t sign something saying that, there is no point in our drafting such a contract and, most importantly, there is no point in your paying us to do so.

So far not a single such IoT company has come back to us saying their Chinese manufacturer will sign such an agreement. Not one.

The situation with the two European companies has also become par for the course. In this situation, the IoT company is farther along in its product development and actually ready to sell what it perceives to be its product. This situation is exemplified by the email below, which is an amalgamation of various emails received by my firm’s China attorneys:I am hoping your firm can help us figure out the best course of action going forward. [A description of their company and their IoT product then follows, along with how they ended up going with a particular Chinese manufacturer and why they failed to seek out the advice of a China lawyer until now. This description too often involves their domestic attorney having said he or she would turn them over to a “China specialist” as soon as that “becomes necessary.”]

I am hoping your firm can help us figure out the best course of action going forward. [A description of their company and their IoT product then follows, along with how they ended up going with a particular Chinese manufacturer and why they failed to seek out the advice of a China lawyer until now. This description too often involves their domestic attorney having said he or she would turn them over to a “China specialist” as soon as that “becomes necessary.”]

We do not have any contracts in place with our current manufacturer. We started our relationship with our current manufacturer a year ago. He told us that POs are contracts in China and our lawyer confirmed that. We sent our Chinese contract our design and we paid for the molds and he shipped us the products. We recently learned that he has been using our product pictures as marketing material on Alibaba and selling our products all over the world. I also just learned that he has filed for a design patent for our design in China.

When I confronted him about this he basically admitted to everything but essentially said he had no intention of changing and if we go to a new factory to try to make our product, he will shut that down.

We’re filing design patents in the US. If we continue to work with him during this period, which agreement would help us get the best protection?

Since he already claimed our designs in China, will that prevent us from working with a new manufacturer? Do you advise we work with a new manufacturer at this point?

Our response is usually something like the following:

A PO is not really a contract in China; it is the placing of an order. Unless your PO speaks to IP (which would be unusual), it probably will not help us much. On top of this, some Chinese courts do not see POs as a contract at all and some Chinese courts will not even look at a document not in Chinese. The ideal is a Chinese language contract sealed by the Chinese company.

Our biggest concern is that this manufacturer has filed for a design patent for your product. This will no doubt pose problems for you and for any new Chinese manufacturer you might seek to use. Depending on how far along your present manufacturer is in the patent process, it may be able to sue you and your Chinese manufacturer for patent infringement damages and to force production of your product to cease. At a minimum, your Chinese manufacturer will be able to cause you all sorts of problems unless you can stop or invalidate his design patent. There is a good chance this Chinese manufacturer “owns” your product in China and it can use that ownership to control what you do there.

If you seek to go to a new manufacturer you can be pretty sure your old manufacturer will NOT give you the molds you think you bought from it and it will use its design patent to try to block your products from leaving China. It also very well may sue you for patent infringement in a Chinese court. In the meantime, making your product in China will be a high-risk proposition.

Did you register your company or brand name or logo as China trademarks? If not, there is a good chance your Chinese manufacturer registered those as well, but for various reasons under the name of what appears to be an unrelated company. If it did that, it will probably be able to stop anyone from making your products in China with “your” company, brand name or logo on them or on its packaging. No matter what else you do, you should consider retaining us right away to see whether it is not too late for us to secure key China trademarks for you. I urge you to read this on China trademarks.

We usually (but certainly not always!) end up advising these IoT companies to seek to do some combination of the following, none of which are great ways to go and some of which do not work at all for some companies:

  1. Leave China entirely and start manufacturing in some other country.
  2. Seek to block or invalidate the Chinese manufacturer’s design patent.
  3. Try to strike some sort of deal with the Chinese manufacturer whereby the Chinese manufacturer assigns the patent(s) and trademarks to our client who in return agrees to keep using that Chinese manufacturer to make x amount of product for x number of years.
  4. Try to get the Chinese manufacturer to sign a contract that makes clear what IP belongs to our client and makes clear the Chinese manufacturer’s limitations on using our client’s IP. We typically do this with a China-centric OEM Agreement.
  5. Go to a new manufacturer in China. If you do this, you almost certainly will not have your molds and there is a good chance your existing manufacturer will cause you a lot of trouble by suing or threatening the new manufacturer.

Don’t let the above happen to you. For more on how you can prevent this, you should, at a minimum, read and heed China NNN Agreements and China Product Development Agreements. NOW!

 

Categories: Chinese IP

China Manufacturing and Robots and OEMs

China Law Blog - Mon, 10/30/2017 - 05:58

With rare exceptions, American and European companies have goods made in China for one reason: because it’s cheaper. Why is it cheaper? Because labor is so much cheaper in China than in the US and Europe, and labor is a significant portion of the production cost. But over the past several years, wages have been steadily rising in China, making Chinese factories progressively less competitive on labor costs. Meanwhile, numerous pundits have made predictions about manufacturing work fleeing China for countries with lower labor costs, and especially Southeast Asian countries like Vietnam or Myanmar. A corollary prediction calls for more reshoring – bringing back manufacturing to the United States.

But the mass exodus from China hasn’t occurred. Thus far most of the manufacturing moving to Southeast Asia has been either redundant manufacturing (i.e., to have an alternate source of production in case something goes awry in China) or manufacturing for goods lower on the value chain. And the reshoring movement is still finding its feet.

China has maintained its competitive advantage in a number of ways. For one thing, it has made enormous investments in infrastructure: raw materials, components, and finished goods travel rapidly and consistently to, from, and within China via a vast web of ports, railways, and highways. None of its competitors come close. Additionally, China’s status as the factory of the world means its factories (and many of its cities) have developed tremendous expertise and specialization. They may have been the cheapest before, but now they’re the most experienced – and sometimes even the most efficient.

A couple weeks ago, Sheelah Kolhatkar wrote an article in The New Yorker about advances in robotics which logically will put a number of factory workers out of a job – no matter where the factories are located. The Chinese factory owners interviewed in the story were almost stereotypically dismissive of concerns about workers rights, and perhaps necessarily so. To them, and arguably as a matter of national economic policy, vast automation is the only way China will remain competitive as a manufacturing base for the rest of the world.

My colleague Grace Yang writes frequently about the challenges companies face when navigating China’s labor laws. Regardless of Chinese factory owners’ attitudes, you’d think they would have a tough time replacing workers with robots. But one of the factory executives quoted in Kolhatkar’s article made a keen insight: up to 80% of factory workers simply don’t come back to work after going home for Chinese New Year. You couldn’t draw it up any better for making a massive and sudden reduction in force.

Of course, US companies that reshore manufacturing with largely automated factories won’t have to contend with disgruntled factory workers, because those workers were laid off years ago. And the better robots get at doing assembly line work, the more it will make sense for goods consumed in the United States to be manufactured in the United States. As Kolhatkar notes, “China was never a particularly convenient place for Western companies to have their sneakers and T-shirts and widgets made.”

But for now, China remains the factory of the world. And the increased shift to automation means there will be an ever-widening divide in China between manufacturers with an eye to the future and manufacturers stuck in the past who can only compete on price but not quality – and won’t be able to compete on price for long. This means that selecting the right manufacturer is more important than ever, and it’s going to be hard to do that without visiting the factory. It also means that a well-written OEM agreement with your Chinese factory is more important than ever. At least, until Skynet becomes self-aware.

Categories: Chinese IP

Part-time Employee Contracts for China Because They Matter

China Law Blog - Sun, 10/29/2017 - 06:46
Do not employ anyone in China without a written employment contract.

China requires an employer have a written employment contract with all full-time employees. But because China’s employment laws can vary so much depending on locale, there is no such universal rule regarding part-time employees. But for many reasons, no matter where you are in China, you should have written employment contracts with your part-time employees as well. The most important reason to have such a contract with all of your employees — full and part-time — is because it will be your best evidence to show what your employment relationship entailed.

Consider this hypothetical. An employer and employee orally agree the employee will work no more than 12 hours each month. The employee works in the finance department and she is allowed to make her own schedule. The employee does not record her attendance. The employer pays her on monthly basis and it pays for all her social insurance (just as it does for its full-time employees). It is unclear when the employee officially started with this employer, nor is it clear exactly when she ceased being an employee.  Around the time of her termination, the employer promised to pay the employee 1.5 months her monthly wages as severance.

The employee sues the employer for (among other things) damages she sustained for being employed without a written employment contract and for the difference between what she made in wages and the local minimum wage. How will the court likely rule?

Most facts of this hypothetical come from an actual case in Beijing. Let’s look at the Beijing court’s analysis here.

At the outset, it is important to note that the employer has converted the employee to a full-time employee by its own actions. How so?

First, Beijing mandates a 15-day payment cycle for part-time employees. This differs from the rules for full-time employees who are usually paid monthly. The employer violated the law by paying the “part-time” employee on a monthly basis and the employer’s payment cycle with this employee suggests the employer viewed her as a full-time employee. Note that the payment cycle standing alone does not determine whether an employee is full-time or part-time, but it is an important factor Chinese courts consider in determining an employee’s status. So you do not want to lump your part-time employees together with your full-time employees in terms of payroll. You should pay your part-time employees every 15 days at most, no matter when you pay your full-time employees.

Second, the employer’s failure to record the employee’s attendance made it impossible for it to meet its burden of proving the employee worked 12 or fewer hours each month and therefore made it impossible for it to prove she was truly a part-time employee. This flexible arrangement essentially set the employer up for trouble because the burden is on the employer to prove the employee’s working hours do not exceed the legal maximum for part-time employees. So foreign companies need to beware. Being too flexible (especially without anything in writing) is a common recipe for foreign company employer problems in China. Third, the employer agrees to pay severance at the time of termination of the employment relationship. In Beijing, employers are not required to pay part-time employees statutory severance when the relationship is terminated. The employer’s choosing to pay severance notwithstanding its argument that this is a part-time employee actually backfires on them.

Third, the employer agreed to pay this employee severance at the time of termination of the employment relationship. In Beijing, employers are not required to pay part-time employees statutory severance when the relationship is terminated. The employer’s choosing to pay this employee severance notwithstanding its argument that this is a part-time employee actually backfired on them as it was yet another factor the court used to determine this employee had not been part-time.

Lastly, the employer contributed the full range of social insurance for this employee, but because Beijing does not require this for part-time employees, these contributions were considered as further evidencing the employee was full-time.

The court ruled this employee was a full-time employee held that she was owed double her monthly wage for the time period she was employed without a written employment contract. Needless to say, the employee also should have been paid at least the local minimum wage because of her “full-time” status.

Just one very clear reason why you should have a contract with your part-time employees. And if you are going to have such a contract, you must make sure it makes sense for China and works under Chinese law.

 

Categories: Chinese IP

How to Protect your Product from China Counterfeiting with 360° Trademark Protection

China Law Blog - Thu, 10/26/2017 - 05:58
Wall out counterfeits of your products

When American and European and Australian companies would come to my law firm for China trademarks to protect their brand names from Chinese copycats, we would tell them that applying for such a trademark would take about a week, but actually getting that trademark could take more than a year. We would then say that until they actually get their Chinese trademark we would be pretty much powerless to stop companies in China from using their brand name. Most didn’t bat an eye at this

E-commerce has changed that, such that now when one of our China trademark lawyers tells a client that securing their China trademark will take a year, those who are selling their product online (which these days is almost everybody) push back and want to know what to do in the meantime to protect against copycats.

Our response, simplified a bit, is to say that they need to focus on “building IP walls outside China.” So for example, if they are selling their product in the United States and in Spain (where I am right now, having just attended a conference put on by our Barcelona lawyers) they should focus on protecting those two countries. The way to do this is to, among other things, secure trademarks in those two countries as quickly as possible.

Though a U.S. and a Spain trademark will not, technically, do a thing in terms of trademark protection in China, it can still be valuable in getting offending ads taken down off Chinese websites such as Alibaba. If “your” product shows up on Alibaba and you have no registered IP, the odds of your getting Alibaba to take it down from an Alibaba website are slim. If your product shows up on Alibaba and you have a registered Chinese trademark that is being infringed by something on an Alibaba website, the odds of your getting that offending ad taken down from Alibaba are good. If you have a Spain trademark and there is an ad on Alibaba clearly targeted at Spain that infringes on your Spain trademark, your odds of getting that ad taken down from Alibaba are not bad, which is a whole lot better odds than if you did not have the Spain trademark at all. The same holds true for the United States.

Of equal importance though is that if you have a United States trademark on your product you can use that trademark to try to keep the offending product from China from reaching the United States. You can do this by working with US Customs and Border Protection, which is authorized to block, detain and seize incoming products that violate U.S. intellectual property rights. The EU and Spain have similar procedures.

One of the best ways to get US Customs on your side to block incoming infringing goods is to secure a registered US trademark and then record that trademark with US Customs and Border Protection. If you record your trademark with US Customs, it will go into its database and if US Customs spots incoming product that infringes on a trademark in its database, it will usually not allow the offending product to go through customs and it will alert you to its arrival. The notice to you from US customs will usually include the names and addresses of the manufacturer, exporter and importer.

And all this for the low low cost of around $200. Once you get your China trademark, you should consider registering that with China Customs to get that government agency working for you on the China side to help prevent infringing product from leaving China in the first place. See How To Register Your China Trademark With China Customs.

For effective IP protection, think 360°.

Categories: Chinese IP

Hollywood, China, and Big Data

China Law Blog - Mon, 10/23/2017 - 15:26

This past Saturday I attended the USC Entertainment Institute on Entertainment Law and Business. In past years the Institute has had entire panels on China, but this year things were pretty low-key, with just one panelist having a China connection (Chia-Chi Li, Director of Tencent’s Content and Technology Transactions Groups).

Why the shift? Undoubtedly one reason is the high-profile collapse of several deals involving Chinese money and Hollywood. Who wants to see a discussion about all the money that’s not being invested? Another possible reason is that the giddiness of the past few years – during which many people in Hollywood viewed Chinese investors as the new “dumb money” – is over and the Chinese entertainment industry is maturing, with most of the remaining players being relatively well-run, competent outfits. Or perhaps it’s that the annual US-China Film Summit is taking place in two weeks, and there are only so many times you can have a “What’s The Deal With China?” panel.

But China nonetheless kept creeping into the discussions. The morning panel on music (“Where the Money is in Music These Days”) broke down the ways in which artists and record labels actually generate revenue today, with particular attention to YouTube and streaming services. The panelists all complained about the revenue stream from YouTube (currently the biggest single medium by which consumers listen to music), but almost as an aside noted that the revenue model for music in China was even worse. Meanwhile, multiple panels referenced the social media/DIY music video phenomenon that is Musical.ly, albeit without a word about the app being Chinese. As I wrote a few months ago, this is exactly the kind of soft power the Chinese government has been hoping for.

Professor Jeffrey Cole, Director of USC’s Center for the Digital Future, started off the institute, as he has done for the past few years, with a fascinating speech about the future of the entertainment industry (“The Industry: Trends, Fads and Transformation”). Although most of his talk centered on domestic concerns, he closed with an intimation that there was a failure of comprehension (and imagination) about the size, wealth, and power of the BAT companies (Baidu, Alibaba, and Tencent), and what it meant for Hollywood.

In determining the future of the US entertainment industry, Prof. Cole noted that two of the most basic concerns are how people spend their time and how they spend their money. In the US, numerous companies are competing for either or both. In China, the competition exists in name only; Alibaba controls the majority of consumer purchases, and Tencent’s WeChat is so dominant and so comprehensive in terms of user base and “stickiness” that – and this is a direct quote from Prof. Cole – it is in many ways like the commercials from the 80s for the Roach Motel: “Roaches check in, but they don’t check out.” Despite the negative connotations, Cole meant it as a compliment of the highest order: a recognition that a substantial majority of the Chinese population uses WeChat all day, every day and for almost everything. We have written about this before – if you are doing business of any kind in China, you need a WeChat strategy. Indeed, we have been approached multiple times by companies interested in forming a WFOE for the sole purpose of opening up an official WeChat account.

Meanwhile, Tencent’s representative, Mr. Li, was one of the best panelists of the institute and with by far the highest degree of difficulty, because whether he wanted to or not, he had to represent the views of himself, his employer, the Chinese entertainment industry, and China as a whole. That’s a lot of water to carry.

Mr. Li made several points worth repeating, but I’d like to focus on two. First, he acknowledged that though some Chinese companies had payment problems because the RMB is not freely convertible, Tencent (and other successful Chinese companies) had access to funds outside China and if they want to make an overseas investment they can. This is true enough, but it somewhat sidesteps the issue: the Chinese government may not be able to control what Tencent does with money in its US bank accounts, but it can certainly control what Tencent does in China, and thereby exert indirect control. Still, the point remains that for large Chinese companies already in the media and entertainment business, not having to secure government approval for every wire transfer is a big advantage.

Second, according to Mr. Li, any foreign film that hopes to do well at the Chinese box office needs a Chinese partner. His specific examples: Warcraft ($47M domestic box office, $386M foreign box office with $213M of that in China) and A Dog’s Purpose ($64M domestic, $136M foreign with $88M of that in China) had major Chinese partners (Tencent and Alibaba, respectively). The LEGO Batman Movie ($175M domestic, $136M foreign with $6M of that in China) did not.

On a certain level, this argument sounds familiar.China is too big to understand without local help, so don’t even try. But Mr. Li was actually making a more subtle point. In his telling, the reason Warcraft was successful in China (and nowhere else) is because Tencent had so much data about its users that it could identify nearly every single Warcraft player in China and could push targeted ads and marketing material to them. Similarly, the reason A Dog’s Purpose did so well in China is because Alibaba had so much data about its users that they already knew the identity of every dog-owning household in China.

It’s a compelling argument if you can get past the Big Brother-ness. I’m not sure it entirely holds up under scrutiny; why wouldn’t this strategy work for every movie released in China? Still, it’s hard to explain the success of Warcraft in China in any other way, because the movie was a critical and popular bomb everywhere else in the world. Maybe it only works for movies with a clearly defined affinity group.

Either way, China will only become more sophisticated in its collection and use of big data and companies going into China will need to keep pace — which probably means partnering with one of the BAT companies — or else they’ll just be rolling the dice. At least in the film business, the stakes are too high to accept those odds.

Categories: Chinese IP

The How and Why of Visiting Your China Factory

China Law Blog - Sun, 10/22/2017 - 10:05
China factory visits. Get on that plane

One of the things our China lawyers are always telling our clients is that they should visit their China factories. Such a trip is critical for the following four reasons:

  1. Visiting your China factory emphasizes that you care. Why should your China factory care if it doesn’t believe you care?
  2. Visiting your China factory makes you a human being and not just a purchase order. This decreases your chances of getting bad quality products.
  3. Visiting your China factory is a great opportunity to see product quality (or a lack thereof) and to work on product quality.
  4. I guarantee the value of what you learn from such a trip will exceed the cost of taking it.

I believe — based strictly on feel and not hard evidence, and without doing any accounting for other variables — that foreign companies that visit their China factories have 90% fewer factory problems than those that don’t. Now before you challenge this, note that we as China attorneys do not make a penny more from our clients that make these visits. In fact, we make less, and yet here we are making clear how important this is.

I have had countless clients go on and on about how much they learned from visiting their China factories, but nobody has ever told me they regretted having made such a visit — not even those who left China convinced they needed to cut ties with their existing factory.

But what should you do on such a visit? My answer is that above all else you should spend time getting to know your Chinese counterparts as this is what will help you down the road. But this is also a great opportunity for you to see what your China factory can do. Can it make your next generation widget, or should you be looking elsewhere? Does your China factory look efficient, or does it look like it has almost no clue? Does it look and feel financially healthy or should you be concerned about your next order?

For a whole host of specific questions that may make sense for your business, I urge you to check out the following:

What do you find most important about your China factory visits?

Categories: Chinese IP

China Scams Rising

China Law Blog - Sat, 10/21/2017 - 11:07

Not sure why but the number of frauds from China seems to be increasing. A lot.

I thought about that last week after our China lawyers received no fewer than three, but this morning was the kicker. I woke up to two of them. Five in one week has to be a record and this record did not come out of nowhere. The number has been on the rise for months. Anyone know why because I sure don’t.

Anyway, as a sort of public service, I am going to run two recent emails below and explain why I believe they are scams. I have changed them where necessary to protect the parties involved.

I’m with a small Nebraska company that sells organic towels and I’ve been reading your posts. We have agreed to basic terms with an import/export company in Xiamen named Xiamen ________ Development Co., Ltd. to sell them 30,000 towels. They have agreed to EXW shipping and to pay 40% upon signing and 60% before shipping. Still, I am concerned. They have asked us to come to Xiamen for signing and the contract does mention a notary, i.e., some of the “red flags” I’ve seen discussed on your blog, but not all. We’ve already spent $1500 on passports and visas, and we are about to book our flights/hotels (they didn’t recommend a hotel). How can we protect ourselves?

My response was as follows:

I am nearly certain this is a fraud so you have essentially two ways to protect yourself. One, just walk away and not go. Two, pay us to do some basic due diligence on this company. I am virtually certain the most basic of due diligence will prove this is a fraud, but if it doesn’t, we can take next steps.

How do I know this is a fraud? For all of the following reasons, none of which I mentioned in the email because there is always the possibility that I am wrong.

1. Why does a company in China need to go all the way to Nebraska to buy organic towels? They don’t and this alone is highly suspicious.

2. The name of the company is “__________ Development ______” and they are in the business of buying and selling towels? I don’t think so. Chinese companies are to a large extent required to list their business in their name and Development and towels just don’t seem to me to go together.

3. The name of the company ends in Ltd., which makes me think it is not a Chinese company at all, but a Hong Kong company. Believe it or not, I am not aware of a legitimate Mainland China company ever committing this fraud. Legitimate Chinese companies are expensive to form and they would have a lot to lose if reported for this sort of fraud. HK companies, far less so.

3. The Chinese company has agreed to pay 40% upon signing and 60% before shipping. Not sure what world you all live in but in my world and that of the Chinese attorneys I know, this sort of payment upfront from a Chinese company doesn’t happen. Like never, and certainly not with towels.

4. The Chinese company wants the American company to go to Xiamen to sign. This makes no sense. If anything, the Xiamen people should be going to Nebraska to sign, and while there they can check out the products on which they will be spending so much money. Wanting to meet in person happens on complicated deals all the time but not one involving the purchasing of towels.

5. The contract mentions a notary. Honestly, I’m not sure I’ve ever seen a legitimate contract come from China that asks for a notary.

6. The email said there were some of the “red flags” we have discussed on here, “but not all.” Other than the fact that the Americans are not being put up in a particular hotel chosen by the putative scammers, I truly do not know what more by way of red-flags would be required.

The other one was somewhat different but at its core, it gave me the same feeling. Here is that one, again with a few changes:

I have been contacted by a company in Yantai, China called _________ Investment Group / Yantai _______University). The person’s name is Wang Xi.

They have asked my company to design a University Campus in Yantai. As I am an Architectural company I assumed the contract was legitimate. I sent the contract to a lawyer who confirmed the contract seems real. I have not been asked to pay any money.

Today I received this email:

We are going through notarization formalities and he will need 2 weeks. After completing the notarization formalities, we will make the first advance payment as soon as possible. Followed by this email: The notary office has accepted the contract documents signed by us. Please find attachment for notarization document, please sign and mail to me. I read the papers they asked me to sign and notice the name of the company wasn’t my company name. Do you have any advice?

Yes. Hire a lawyer who knows something about China as this reeks so much of fraud that I can smell it all the way here and I am in Spain right now [for this].

This one is a bit more difficult to prove just on the emails but, again, none of it makes much sense. Why does a University in China pick someone overseas to design its buildings when there are so many foreign architecture firms with offices in China? And again, what is it with the notarization? And this “university” just happened to get the name wrong on the contract? You don’t think that might be because it sends out hundreds of these contracts in the hopes just one company bites?

None of this smells right and asking some random lawyer who doesn’t breathe China contracts every day to determine the validity of the contract is a complete waste of time. Anyone can pull what looks like a contract off the internet, but that does not mean it is a real contract for China.

Anyway, just you be careful out there. Especially now.

Categories: Chinese IP

THE China Employment Law Guide AND Webinar

China Law Blog - Wed, 10/18/2017 - 01:08

China employment law is technical and getting technicaler (yes, I made up that last word but you know what I mean). See China Employment Law: Local and Not So Simple. It is one of the most consistent problem areas for foreign companies doing business in China and it has become a massive growth area for our law firm. As we are always writing, China wants harmony and China is a communist country. Combine those two and you have a country that wants to keep its workers happy, especially as compared to your run of the mill foreign company that operates in China and competes with Chinese businesses.

All of this combines to mean that if you have employees in China or you are thinking of having employees in China it is of paramount importance you have at least some understanding of what is required of you as an employer in China. This book, for the low low price of less than $20 in paper form, gives that to you. It is also sold as a Kindle version for $9.99, but you really should spend the extra $10 to be able to have it in physical form in your office for you and anyone else to be able to consult easily whenever necessary. I am writing about this book again today because we just learned that it is now available at Barnes & Noble as well as at Amazon.

Disclaimer: This book is written by our lead China employment lawyer, Grace Yang and we get a cut of every sale.

Our typical attorney-client interaction on China employment laws usually goes something like this:

  1. Foreign employer company contacts one of the China lawyers at my firm because it terminated an employee and that employee has either sued or threatened to sue, oftentimes over a technical violation by the foreign employer.
  2. One of our China employment lawyers looks at the case and determines the foreign company employer violated Chinese law in the termination and the employee would almost certainly prevail in his or her claim. See China Employee Terminations: Don’t Get Lazy.
  3. We explain the above to the foreign company employer and we learn the company is violating China’s employment laws with all of its employees.
  4. The foreign company employer wants its violations excised.
  5. We then conduct an employer audit to determine what other employment problems need fixing. See China Employment Compliance and Audits: THE New Big Thing.
  6. The employer audit invariably generates a laundry list of problems that require fixing.
  7. We fix the employment law problems, one by one.

Foreign company employers have so many employment problems in China not just because China has started getting so tough with such problems and not just because there is probably but one employee in all of China who does not understand the leverage they hold over foreign employers –and that one employee probably will immediately find a lawyer who will tell them of their employee rights? The small to mid-sized foreign company typically goes into China with maybe one or two foreign employees and one or two Chinese employees, none of whom know anything about Chinese employment laws (on the local, regional or national level) and all of whom are — naturally — focused more on getting the business off the ground than on complying with the letter of the multiple sets of China employment laws. And anyway, at this point they are usually a tight-knit group of founding employees who view themselves as much as founders as they do employees and who all get along with each other and view their futures with the company as bright. As the company grows, little to nothing changes on the China employment compliance front, mostly because nobody realizes how important it is to make the changes and because even if they did, there is nobody in-house who knows how to do it. Plus, why spend money on complying with obscure employment laws when there has never been a problem necessitating that? So employment law compliance gets kicked down the road.

But then a problem arises and a China attorney at my firm gets called — usually by someone high up in the U.S. or the Europe or the Australia office as opposed to someone on the ground in China. The person who calls us is often the head of HR, the CFO or the CEO who is trying to find out what is going on with HR in China and is receiving only vague or nonsensical responses and is starting to worry.

All of the above is my long-winded way of saying foreign companies with employees in China need to get on top of their China employment situations and stay there. Employer audits are the way to go in most situations, but in the meantime and as a supplement, it is critical someone at your company understand China employment law basics. Someone at your company needs to know enough to be able to spot your company’s China employment law issues before they blow sky-high.

The China Employment Law Guide is the book for that and you really really really should buy it and put it on your shelf. And when I say put it on your shelf, I mean you should buy the softcover version (not the Kindle version) so you can literally put it on your shelf. Heck, get more than one copy and give it to everyone in your company who manages your employees or plays any role in their hiring or their firing. This book is meant to be used for background and for reference and as a decision-making guide.

Just a little bit about Grace Yang, its author. Grace grew up in Beijing and excelled at and graduated from China’s best law school there — Beijing University. She then came to the United States to attend the University of Washington law school where she again excelled and graduated. Grace is my firm’s lead China employment and labor lawyer and she is the lawyer at our firm to whom everyone else goes for China employment and labor law questions. Grace is a licensed U.S. lawyer (she is licensed in both Washington and New York) and she splits her time between Seattle and Beijing.

Anyway, did I tell you that you should buy the book? Of course I did and you should. And while on the subject of shameless plugs (hey, come on, how many of those have you seen in our more than a decade writing this blog?), I would be remiss if I did not also mention that Grace will be putting on a webinar on October 26 on Chinese Employment Law Landscape: Key Issues and Staying Compliant in the Local Market. This webinar is described 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 via a dispute. As such, it is imperative that you understand the framework of Chinese employment law and steps you can take to mitigate risk.

Please join Grace Yang as she helps you better understand the Chinese employment law landscape. She will focus on helping you recognize key China employment issues and give you guidance on how to solve real-life China employment law issues and problems.

WHAT YOU’LL LEARN

This webinar will cover the following:

  • The basics of China’s employment law rules
  • How to draft an employment agreement that works for your China locale
  • How to draft China employer rules and regulations (aka employee handbooks)
  • The other agreements you should consider for your China employees
  • Frequently contested issues, such as overtime, vacation days, commission payments, and leaves of absence
  • Employee terminations
  • HR audits
  • AND MUCH MORE!
YOUR CONFERENCE LEADER

Your conference leader for “Chinese Employment Law Landscape: Key Issues and Staying Compliant in the Local Market” is Grace Yang. Grace heads Harris Bricken’s China employment law practice and contributes a weekly column about China employment law issues for the multi-award winning China Law Blog. Grace received her B.A. degree in law from Peking University and her J.D. degree from the University of Washington School of Law. She represents both China employers and employees in their China employment law matters. Grace recently published a book entitled The China Employment Law Guide.

How can you miss it?

Categories: Chinese IP

Make China Trademarks a Priority

China Law Blog - Mon, 10/16/2017 - 05:58

I am not a big fan of filing Madrid Protocol applications for China. In certain situations, they can work well, but when they don’t work (which is fairly often, especially when applications are filed without forethought) the trademark registration process takes longer and costs more than just filing a national application. See China Trademarks. Register Them In China Not Madrid.

 Filing a priority application in China is another matter. As part of the IP modernization begun under Deng Xiaoping’s leadership, China acceded to the Paris Convention in 1984. Under the Convention, if you file a trademark application in one Paris Convention country, and then file an application on a priority basis in another Paris Convention country within 6 months of the date of the original application, you can claim the first filing date as the date for your subsequent applications as well. For example, if you filed a trademark application in the United States on May 1, 2017, you would have to November 1, 2017 to file a trademark application for the same goods/services in China and still be able to claim the May 1, 2017 filing date for your China trademark application.

The vast majority of countries in the world are signatories to the Paris Convention, so the convention has a wide-ranging effect. Priority filing is particularly important in first-to-file countries – first and foremost China – where there often truly is a race to the trademark office between legitimate IP owners and unsavory trademark squatters. See Register Your China Trademark or Go Home.

Priority filing can be an extremely useful tool for China trademark protection, but there are a couple common misconceptions about it. First, priority filing will not improve your odds of registration. The only thing priority filing does in China is establish an earlier filing date. An application filed on a priority basis is considered a national application, and once it is submitted it goes through the same examination process as any other national application. In other words, if you have priority filing for a brand name or a logo that has already been registered as a trademark in China, you will not succeed in getting your brand name or your logo registered in China. Second, priority filing is not the only option for filing in China. Sometimes clients will contact us in a frantic rush because they have received notice that they only have a few days before the priority filing window closes, and they believe that once that window closes they will not be able to file an application in China. Not so! The only effect of the priority window closing is that you cannot claim an earlier filing date. Going back to the earlier example, if you filed a trademark application in the United States on May 1, 2017, and then filed an application in China for the same goods/services after November 1, 2017, the filing date would be the actual filing date.

Second, priority filing is not the only option for filing in China. Sometimes clients will contact our China IP lawyers in a frantic rush because they have received notice they have only a few days before the priority filing window closes on their trademark and they believe that once that window closes they will not be able to file a trademark application in China at all. Not so! The only effect of the priority window closing is that you cannot claim an earlier filing date. Going back to the earlier example, if you filed a trademark application in the United States on May 1, 2017, and then filed an application in China for the same goods/services after November 1, 2017, the filing date in China would be the actual filing date for China. Priority filing changes the filing date, nothing else.

Another important point regarding priority filing is that priority filings are limited to the same goods/services as in the original application. In this way, priority filing is similar to Madrid Protocol filing, and often not well suited to filing in China. But if the application only covers a narrow range of clearly stated goods/services, and those are the only goods/services that you care about protecting in China, it will work just fine. Priority filing cannot be used for the “Starbucks strategy” of covering all goods/services. But if you use it to establish a beachhead and cover the most important goods/services, it will usually dissuade the first wave of squatters.

Because the description of goods and services for trademarks in the United States (and for many other countries as well) is often quite different than the description of goods and services for China trademarks, for clients interested in filing in both countries I generally recommend filing concurrent applications without regard to priority. But for clients who first file in the United States (or some other Western country) and then realize belatedly that they ought to protect their IP in China as well, a priority filing can be ideal. More than once, a priority application has meant the difference between securing a China trademark registration and having to deal with a trademark squatter with superior rights.

Categories: Chinese IP

China Employee Terminations and Why Mutual Terminations so Often Make Sense

China Law Blog - Sun, 10/15/2017 - 14:54
How to terminate a China employee: make it mutual if you can

Terminating China-based employees is difficult. Article 40(2) of China’s Labor Contract Law permits an employer to unilaterally terminate an employee, with severance, if the employee is incompetent and remains incompetent after training or assignment to a different position. In practice though, Chinese courts tend to be very strict in applying this law and employers that fail to have “checked all the boxes” before the termination almost always face adverse consequences.

Consider hypothetical 1: The employer and the employee enter into a written employment contract in year 1. The employer also provides its employee with a written statement explaining its expectations and performance requirements for the employee’s position. The employee signs on that statement but the employee’s performance perpetually fails to meet the employer’s expectations, The employer unilaterally terminates the employee for “poor performance” and pays the employee statutory severance: three months salary, plus one additional month’s salary in lieu of advance notice. The employee sues on the basis of unlawful termination.

How will a Chinese court likely rule: This termination will almost every time be deemed unlawful because the employer failed to generate good contemporaneous evidence of its employee’s failure to meet the job requirements.

Now, let’s consider hypothetical 2. Same facts as above, except that the employer did yearly performance reviews and documented the results. These performance reviews indicated the employee was not cutting it and they were acknowledged and signed by the employee. Then during the next 6-month period, the employee did nothing to improve her job performance and it became clear the employee was not going to get better at her job. The termination notice in year three was the same: unilateral termination of the employee with the same amount of severance for “poor performance..”

In this scenario, the employer did a better job documenting the employee’s incompetence but it will still almost certainly lose. The employer will lose because it did not follow the law in making the termination decision as it did not provide the employee with any training so she might improve at her job nor did it ever assign her to a different position. For these reasons, the employer will lose for failing to meet its burden of proof regarding the need to provide a failing employee with training or a different position.

Hypothetical 3. Same facts as above, except: during the 6-month period before termination, the employer worked with the employee diligently to come up with a corrective plan for improvement. The employer worked with the failing employee on correcting her work errors, on monitoring her work progress and on providing her with ample training, all of which the employer documented clearly in writing.

Will this employer prevail in a legal proceeding initiated by the employee? Probably yes. I say “probably,” for two reasons. First, generally speaking, if there is a workers union, the union needs to be consulted before a unilateral termination decision can be made final. Failing to go through this step may subject to the employer to liabilities for unlawful termination. Second, even assuming there is no workers union, there may still be additional requirements imposed by the local authorities and those will need to be followed as well.

Your outcome from your termination decisions will, of course, depend on the facts, including where your company and your terminated employee are based. Note though that even in the last hypothetical the multiple hoops with which employers must jump through to satisfy their burden of proof it oftentimes makes sense even for employers that have followed all termination steps to come to a mutual termination agreement with their terminated employee to avoid the legal battles altogether. The more you do right, the less you will usually need to pay.

 

 

Categories: Chinese IP

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