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You know how when you buy a particular kind of car you all of a sudden see that particular brand of car everywhere? A similar thing has been happening to our law firm with respect to Vietnam. As soon as we brought on a really experienced Vietnam lawyer, we started seeing Vietnam opportunities just about everywhere:
- The high end shoe company client that was being threatened with a massive law suit in China by its China supplier for funds allegedly owed that supplier for shoes that our client literally could not sell? Start making the shoes in Vietnam.
- The clothing company that paid its long-time China supplier right before that supplier shut down and disappeared with all of the money? Transfer manufacturing to Vietnam?
- The American company whose China work force and China suppliers have combined to raise costs so much that it can no longer make a profit? A move to Vietnam is in order.
But what has recently really put the frosting on Vietnam’s cake has been the increased coziness between the U.S. and Vietnam governments. The New York Times did a story on this, entitled, In China’s Shadow, U.S. Courts Old Foe Vietnam, mostly focusing on the rapidly warming political relations between the two countries. But needless to say, with the warming political relations has come warming economic relations and what that means on the ground is that Vietnam is redoubling (if retripling were a word I would have used it) its efforts to bring in American businesses. I was in Vietnam during the riots against Chinese businesses and the word everywhere was that declining Vietnam-China relations meant that Vietnam would need to buff up its welcome mat for American companies and it has unrelentingly done so pretty much ever since.
Two days ago, in Foreign Executives in China. Worry Me Yes or Worry Me No? we wrote about how American executives that have acted within the law in China need not panic due to what is happening there with the onslaught of anti-corruption and anti-trust claims being brought against foreign companies. But that does not mean that American companies should not be looking at their China businesses holistically and making the tough decisions as to whether to stay or go or maybe just supplement.
For more on Vietnam as a China replacement, check out the following:
- New China. New Vietnam.
- China Plus One: How Vietnam’s Riots Help American Businesses
- Where To Locate Your Business In China Or Asia
- Doing Business in China with an Asia Strategy
- The End Of Cheap China. The Next China Will Be The Post-China 16. Maybe.
- China Plus One. A Strategy (Or Just A Theory) For Every Size Business.
- China: Bad Meat, Cultural Differences And Anti-Corruption Compliance
A major trend in the business software business is provision of software not through installation on a customer’s computer but rather through online access using the Internet. This approach is known as software as a service (SaaS). Though SaaS is a major trend in the U.S. and Europe, SaaS in China by a foreign company or a WFOE is not possible. This poses major issues for foreign software companies seeking to enter the China market.
China recognizes the SaaS method of providing software. However, use of the Internet requires that the provider acquire a commercial ICP license. Since SaaS by definition makes use of the Internet, all SaaS systems in China require the provider obtain a commercial ICP license.
Here is where the problem arises. A WFOE or other foreign owned entity cannot obtain a commercial ICP license in China. There are no exceptions to the rule. Accordingly, if a WFOE or foreign entity wants to offer its software in China though a SaaS system, it must do using an indirect method such as licensing the software to a licensed Chinese entity through a method often called an “Internet portal”.
China’s Ministry of Industry and Telecommunications (MIIT) is in charge of Internet licensing. The MIIT has become even clearer on the SaaS rule as it confronts the growth of software business in China. In particular, its position on foreign software providers has hardened over the past several months as China responds to Snowden’s NSA revelations and the cyber espionage claims of the U.S. against the Chinese military. In the past, many U.S. software providers argued that the commercial registration rule did not apply to their business because no e-commerce was conducted on the SaaS site. Others argued that a Ministry of Commerce exception applied to their SaaS offerings. These arguments have been forcefully rejected by both the Beijing and Shanghai offices of the MIIT and they cannot be relied on for future SaaS business in China by foreign companies.
Accordingly, a WFOE has available the following two methods for selling its software in China:
- Direct sales to customers. Software is installed on the client server and all data is housed on the client server as well. If the client wants to make the data available to the general public, the client does this on its own Internet site, under its own license. The WFOE would in no way be involved in this process. The WFOE could of course be engaged to manage the entire process, including creating an intranet available only within the client’s premises or as an Internet site available to the general public. The licensing (commercial or non-commercial) for such a public website depends on how the service is constructed.
- SasS offered through a service/license agreement with a 100% Chinese owned Internet ”portal.” As noted above, provision of software through SaaS cannot be done directly by the WFOE because the provision of SaaS services in China by ANY entity requires a commercial ICP license. That is, if a 100% Chinese owned company wants to provide its software through SaaS, that Chinese entity must obtain a commercial ICP license. Note that it is not relevant what the customer will do with the software. All that is relevant is that 1) the customer is paying for the software and 2) access to the software is delivered through the Internet. Thus, the argument that SaaS software is not commercial because no e-commerce is done on the providing website fails. If the WFOE is paid for the software the whole transaction is commercial and it is therefore subject to the commercial ICP license requirement that applies to all SaaS activities in China.
To use a SaaS approach, the WFOE will be required to offer the software through a Chinese owned company that owns a commercial ICP license. Such an entity is referred to as an Internet portal. Under an agreement with a portal, the WFOE would contractually engage the portal to offer the SaaS software package, using the portal’s license as the applicable commercial ICP license. Because the portal approach is new in China, there is currently no standard portal agreement or portal structure.
Though the portal approach is a new concept, the MIIT officials in both Beijing and Shanghai have in just the last few months told our attorneys on multiple occasions and without hesitation the following:
- SaaS CANNOT be done directly by a WFOE. There are NO exceptions.
- Indirect provision of foreign software services through a portal arrangement is acceptable because the portal entity will be entirely responsible for complying with Chinese law. All MIIT offices we have contacted have affirmatively recommended the portal approach without any prompting from us.
To summarize: there are two ways a WFOE can sell software in China: Direct sales through the WFOE or indirect sales through an Internet portal. There is no intermediate method that allows for direct sales using the SaaS approach.
Many of our clients are contacted by ISPs, cloud service providers and related entities in China who claim to offer just such an intermediate method. Such offers should be viewed with caution. In our experience, these offers are coming from two kinds of companies: 1) companies that do not understand the law and 2) companies whose business model is built around evading/violating the law. Given China’s current legal environment regarding foreign companies, it makes little sense to operate in a way that claims to exploit a loophole or grey area.
With the media recently paying so much attention to foreign businesspeople getting in trouble in China, the phones of our firm’s China lawyers have been ringing off the hook from worried Americans based in China. We are getting the following kinds of questions and we are giving the following kinds of short answers (needless to say, our long answers are much more nuanced):
1. Should I leave China? Not unless you or your company have violated Chinese law in such a way that you are at risk for going to jail.
2. But isn’t China arresting innocent foreigners? Not as far as we can tell. We obviously do not have all of the facts or even close to the facts we need to answer this question with any sort of certainty, but it appears that China is going after foreigners it honestly believes have violated Chinese law. We see so many foreign companies operating in violation of Chinese law that we almost have to believe that no matter what the reason is for China’s increased crackdown against foreigners, there is no need for China to start arresting people for no legal basis at all.
3. What about my D&O insurance, that will cover me won’t it? Not exactly. It will may prevent you from having to pay for your own defense but it sure as heck isn’t going to keep you out of a Chinese jail.
4. But if they come after me, I’ll have time to just leave on an airplane right? Very doubtful.
5. Is this crackdown really any worse than it’s always been? We are not sure. It feels like it is but that is always hard to gauge.
6. What should I do to avoid going to a Chinese jail? Don’t violate the law. More importantly, make sure nobody else in your company is violating the law.
7. Am I crazy to be worried? Absolutely not. You’d be crazy not to be worried. Your worry will lead to you and your company taking necessary steps for protection, so it’s a good thing. Just don’t worry too much and don’t let it paralyze you. Again, it just does not seem that China is acting randomly here.
8. But what about Chinese companies, aren’t they all doing what these foreigners are getting arrested for? Yes, but so what? How will that help you?
7. Should I leave China right now? See #1 above.
I am going to conclude this post with a really really long list of the posts we have done over the years relating to criminal liability for foreigners. I am providing this long list to show that this issue goes all the way back to the inception of this blog in 2006, to show the panoply of criminal issues that can impact a foreign business in China, and mostly just to show that China has not and probably is not going after people without any legal basis for doing so.
- China Corruption Crackdown Continues Apace. Next Stop Edelman?
- China: Bad Meat, Cultural Differences And Anti-Corruption Compliance
- Foreign Company Corruption In China. If You Have To Ask…
- China’s Corruption Clean-Up. Get On Board Or Go To Jail.
- China And The FCPA. Just When You Thought It Could Not Get Any Worse.
- Going To Jail For China Bribery. Now That We Have Your Ear…. (on a Wall Street Journal article written by our compliance attorney, Chris Priddy)
- China Law Enforcement Efficiencies Rising
- Rule One For Doing Business In China. No Bribery. Rule Two, Make Sure Of It.
- The Double Standard “Tax” On Foreign Companies Doing Business In China. What To Do?
- Dude, Didn’t Your Mamma Tell You Not To Engage in China Bribery Through Intermediaries?
- Doing Business In China Without An Anti-Corruption Compliance Program? Are You Crazy?
- Doing Business In China Illegally. Calling A Table A Chair Does Not A Chair Make.
- How To Handle A Chinese Government Raid. Very Carefully.
- China Customs Problem? Keep Your Mouth Shut!
- Bribery In China. Is It Worth It?
- Doing Business In China. Do Not Pass Go. Do Not Go Directly To Jail.
- Judicial Reform In China And Its Impact On Foreign Investment. Part Two, The Criminal Side.
- China’s Detention Of Foreigner For Alleged Customs Violation Should Be A Strong Warning
- The Sentencing Of Matthew Ng. A Very Long “No Comment.”
- China Business. China Jails. China Hostages.
- Bribery In China And How To Get Caught. Have Employees.
- China Corruption. Et Tu? Do You Even Know?
- Giving Gifts In China. Giver Beware.
- China State Secrets. Buyer Beware.
- Defining State Secrets In China, Part II.
- Is China Cracking Down On Foreigners? Again.
- Google, Rio Tinto And The State Of Business In China.
- A Google-China Cheat Sheet. Rio Tinto. Rio Tinto. Rio Tinto.
- China, Haiti, Patty Murray, And Why Following The Law Makes Sense. Always.
- China Food And Drug Outsourcing Gets Criminal. Fast.
- Understanding China FCPA Risks. Who Is A Foreign Official?
- The Foreign Corrupt Practices Act. Can You Say China Relevant?
- Sanlu’s Lessons For Foreign Managers In China….Because Jail Is Probably Not Where You Want To Be.
- Avoiding Chinese Jails. The Thai Bar Edition.
- Avoiding Chinese Jails. I’m Talkin’ To You.
- Sanlu’s Lessons For Foreign Managers In China….Because Jail Is Probably Not Where You Want To Be.
- China Joint Ventures And Really Bad Milk. What Can You Do?
- Beijing Olympics — You Want Jail Time With That?
- Bad China Products. Hey, It’s A Criminal Thing, Part II
- Bad China Products. Hey, It’s A Criminal Thing.
- Chinese Nationalism: Want Jail Time With That?
- Are Some US Firms Violating US Law In China?
- Bribery In China. Violate The Law, Go To Jail
- Criminal Law And Business In China — A Strong Caution
- Amazing Lawyers And The Criminal Side of China Business
Our law firm has in the last year had probably twice as many counterfeit matters as in any prior year. Not sure if this is because counterfeiting is on the increase or if it is just because American companies are getting so sick of it that they are becoming more likely to take action. Most of these matters involve Chinese companies shipping counterfeit product into the United States.
There are all sorts of ways to try to shut down Chinese counterfeiters but today’s post focuses on only one of those: trying to shut down the counterfeiter’s domain name. In a subsequent post we will talk about using a Section 337 action before the International Trade Commission.
Chinese companies are quick to register domain names similar to those of the foreign companies they see. We frequently see the following sorts of domain name thefts by Chinese companies seeking to sell counterfeit products:
- Domain names that contain a common typo of a known trademark.
- Domain names that take a known trademark and attach a generic word like “outlet” or a word descriptive of the product, such as “shoes.”
- Domain names that are exactly the same as a known trademark’s domain name, but with a different extension. For example, abc.net, instead of abc.com.
It is usually relatively easy to shut down the domain usage by companies selling counterfeit products, even when it is a Chinese company with the domain name. The Internet Corporation for Assigned Names and Numbers (“ICANN”) developed The Uniform Domain Name Resolution Policy (“UDRP”) to resolve domain name disputes, and international arbitration of disputes under UDRP is administered by a list of ICANN approved dispute resolution service providers.
Anyone who registers a domain name has agreed to the registrar’s terms and conditions and that includes committing to be bound by the UDRP. he UDRP’s purpose is to prevent cybersquatting, which is defined “as registering, trafficking in, or using, a domain name with bad faith intent to profit from the goodwill of a trademark belonging to someone else.” Tenneco Automotive Operating Company Inc. v. Naushad Dhukka / SoftDot Technologies, LLC,NAF, FA1104001384326 (May 31, 2011).
When a complainant can show that another party is using a domain name in “bad faith,” the UDRP will either transfer or cancel the offending domain name at the request of the complainant. We usually recommend that the domain name be transferred to our clients so nobody else can grab it at some later date and then force our client to go through another UDRP domain name arbitration.
Companies need to be proactive in locating and excising “bad faith” websites as soon as they are discovered because those offending sites can not only damage a company’s online presence, they infringe upon and can ultimately dilute legitimate trademark rights. Of course, this only shuts down those domain names that are already in existence; it does little to prevent new ones.
At least once a month, one of our China lawyers will get a call from someone asking us to form a “China company” for them before they start doing business in China “next month.” Half the time when we get this sort of call, the better solution is not to form a China entity at all. The other half of the time, the problem is that forming a China company typically takes at least four months and after you finish reading this post you will understand why.
American lawyers often take on domestic company formations as a loss leader because the work tends to be fast and easy and they expect that the firm will get additional legal work once the company is formed. With China company formation, I often joke that the process is so onerous that our client never wants to speak with us again after we finish.
This post focuses on forming a Wholly Foreign Owned Entity (WFOE) in China because this is by far the most common entity formed for foreign companies doing business in China. I would estimate that of the last 200 companies my law firm has formed for American companies in China, 180 have been WFOEs, 18 have been joint ventures, and two have been representative offices. (And the joint venture numbers are only that high because one of our China lawyers is so well known for his joint venture expertise.)
The steps for forming a WFOE in China typically initially consist of the following:
1. Determining if the proposed WFOE will conduct a business approved by the Chinese government for foreign investment. China remains closed to foreign companies engaging in certain types of business, and regularly issues a catalog detailing which industries are open to foreign investors, and under what constraints. For some industries, foreign investment is only allowed via joint venture.
2. Determining if the foreign investor is an approved investor. In theory, any legally formed foreign business entity is authorized to invest in a WFOE in China. The investor must provide documentation from its home country proving it is a duly formed and validly existing corporation, along with documentary evidence identifying the person from the investor authorized to execute documents on behalf of the investor. The investor also must provide documentation demonstrating its capital adequacy in its country of incorporation.
To meet these requirements, the following documents are normally needed from the investing business entity:
- A copy of a Certificate of Good Standing (or equivalent document) that has been certified by the issuing Secretary of State (or equivalent), authenticated by the Department of State, and then authenticated by the Chinese Embassy.
- A copy of a Business License (or equivalent document identifying the investor’s directors and officers) that has been certified by the issuing Secretary of State (or equivalent), authenticated by the Department of State, and then authenticated by the Chinese Embassy.
- An original bank letter attesting to the investor’s sound banking relationship and account status.
- A copy of the passport of the investor’s signatory.
- A description of the investor’s business activities, the most recent annual audit, and supporting materials such as documentary proof of the investor’s involvement in the selected industry for at least three years.
Depending on the Chinese city of incorporation, some or all of the above needs to be translated into Chinese or summarized in Chinese.
Many investors create special purpose subsidiaries (often in Hong Kong) to serve as the investor in China. Though the Chinese regulators have become accustomed to this process, they will still seek to trace the ownership of the foreign investor back to a viable, operating business enterprise; investor secrecy is not an option in China. However, the corporate register for the Chinese company will merely state the name of the foreign, special entity investing company as the owner. In that sense, as far as public disclosure is concerned, investor privacy can be maintained.
3. Chinese government approval for the project — that is, the work which the WFOE proposes to undertake. In China, unlike in most countries with which Western companies tend to be familiar, approval of the project by the relevant government authority is an integral part of the incorporation process. If the project is not approved, no incorporation is permitted. The two are inextricably linked.
The following documents must be prepared for incorporation/project approval:
- Articles of Association. This document should set out all details of management and capitalization of the WFOE. Nothing can be left for future determination. All basic company and project issues must be determined in advance and incorporated in the Articles. This includes identifying directors, local management, local address, special rules on scope of authority of local managers, and the amount of registered capital.
- Feasibility Study. The WFOE will not be approved unless the local authorities are convinced it is feasible. This usually requires a basic first-year business plan and budget. We typically use a client-produced business plan and budget as a model for drafting a feasibility study (in Chinese) that will satisfy the requirements of the Chinese approval authority.
- Lease. Most Chinese cities require the investor provide an executed agreement for all required leases. This means an office lease as well as (depending on the industry) a warehouse/factory lease. It is customary in China to pay rent one year in advance and this must be taken into account in planning a budget because the governmental authorities will be expecting this. Moreover, each lease must be for a space that is suitable for the proposed industry and approved for use by a foreign-invested entity. The investor must also provide documentary proof that the landlord owns or controls the property and has a business scope enabling it to rent out the space. We oftentimes spend weeks confirming that our client’s proposed space can work for a WFOE.
- Proposed personnel salary and benefit budget. If the specific people who will work for the company have not yet been identified, one must at least specify the positions and proposed salaries/benefit package. Benefits for employees in China typically range from 35% to 40% of the employee base salary, depending on the location of the business. Foreign employers are held to a strict standard in paying these benefit amounts. The required initial investment includes an amount sufficient to pay salaries for a reasonable period of time during the start up phase of the Chinese company.
- Passport, photos, and résumé of the WFOE’s legal representative, and sometimes of other named directors and officers.
- The Chinese name of the WFOE. This must include the WFOE’s business scope.
- Any other documentation required for the specific business proposed. The more complex the project, the more documentation that will be required.
All of the above documents must be prepared in Chinese.
It usually takes two to five months for governmental approval, depending on the location of the project and its size and scope. On large and/or complex projects, the approval process often involves extensive negotiations with various regulatory authorities whose approval is required. For example, a large factory may have serious land use or environmental issues. Thus, the time frame for approval of incorporation is never certain. It depends on the type of project and the location. Foreign investors must be prepared for this uncertainty from the outset.
All of the above documents must be submitted to the authorities in the specific district in the city in which the WFOE will be located. This means that the investor must find office/warehouse space and sign any required leases before it can even begin the application process.
The above is the agony. The ecstasy is when the company is finally approved, which, believe it or not, happens pretty much every time so long as the American company does all of the above correctly.
ALM, publisher of The American Lawyer, The Recorder, Corporate Counsel and The Asian Lawyer magazines, will be hosting the inaugural US-China Legal Summit in San Francisco on Thursday, October 9, 2014. Registration is free for in-house counsel and we have managed to secure a 50% discount for China Law Blog readers.
This event will present best practices for companies seeking to make the additional of Sino-American commerce while minimizing risk and meeting compliance requirements. Topics will include:
- Anticipating, Preparing for and Navigating Arbitration & Litigation in China
- How to Respond to and Manage Anti-Trust Investigations in China
- Managing FCPA Risks in China
“Don’t miss your chance to discuss your challenges and strategies related to business and legal relations in China with peers from companies such as ConAgra, John Deere, Google Inc., Whirlpool Corporation, McKesson Corporation, and more.”
I will be co-chairing this event, along with Randall Lewis, Vice President and International Counsel at ConAgra Foods Inc.
To get your 50% off registration discount, use Promotion Code CLBVIP when registering and for additional. details on the agenda and to register, please visit the Summit website here.
We hope to see you there.
By Lucas Blaustein*
U.S. agricultural exports to China have increased by 120% since 2008, to nearly 28.9 billion dollars in 2013. Agriculture now accounts for nearly 24% of US-China trade .
Since China’s admittance to the World Trade Organization (WTO), China and the United States have increasingly traded their comparative advantages. Daily, Chinese made iPads, Lenovo computers, Nike sneakers, and other material trappings of American consumerism arrive in U.S. ports, where they are unloaded and then returned filled with U.S. grain products like soybeans and corn. But in November 2013 the system began to break down, as corn exports to China came to a halt.
What caused this halt was the discovery by China’s Inspection and Quarantine Services (CIQS) of an unapproved genetically modified corn varietal called MIR-162 in imported shipments. Import permits began to be denied, and US corn exports to China gradually decreased to nothing. Grain merchandisers and U.S. farmers were horrified, as the fastest growing market for U.S. corn closed its doors.
Agribusiness companies and Chinese importers were quick to react, replacing corn grain as the number one U.S. export to China with a corn based ethanol byproduct called distiller dried grain with solubles (DDGs). For a time it seemed that American grain merchandisers had found a solution to China’s ban on U.S. corn with DDGs, but this “solution” was short-lived. In the spring of this year China stopped returning import permits for DDGs. After months of confusion, the U.S. Embassy in Beijing on July 24 received a short message stating that “U.S. DDGs imports must now be tested at origination for the unapproved gene MIR-162.” In the space of a day, traded corn prices dropped by more than half.
Shortly thereafter the USDA issued a statement asserting that there is no reliable, affordable method of testing for MIR-162 in DDGs, nor is there even a regulatory body in the United States with the manpower or funding to conduct such a test, even if one existed. In other words, what China did on July 24 was to ban importation of all U.S. corn based products.
Why did China do this?
Sino-U.S. relations are at one of their lowest points since before China’s period of great opening up. In light of recent events involving Apple, Microsoft, GSK, Cisco, KFC, Starbucks and many other American businesses in China, it would not be out of bounds to view China’s ban on U.S. corn imports as punishment for worsening relations. The National Grain and Feed Association (NGFA) estimates that China’s ban has cost U.S. farmers and agribusiness firms nearly three billion dollars. U.S. farmers could be hit especially hard during the upcoming year, with larger than average corn yields anticipated, and more new unapproved GMO varietals in the ground.
But what is often lost from the punitive argument is the Chinese side of this story.
In 2,500 years of historical records, famines were observed in at least one Chinese province every year up until the mid-20th century. While in modern times greetings like, “你吃饭了吗”？, or “have you eaten?” have become a signal of a person’s rural upbringing, they are still indicative of the powerful impact of food insecurity on Chinese psychology. It is this history that leads China continue to emphasize food security in its annual No. 1 Document, which this year made clear that “China should take good control of its own bowl,” by “intensifying support and protection for [domestic] agriculture.” There are three parts to China’s food security policy: 1) invest in modern agricultural practices and grain storage capacity; 2) develop local GMO varietals to increase crop yields; and 3) protect local grain farmers.
Through investments in modern agricultural practices, total corn production in China has risen rapidly from 165 to 205 million metric tons, a near a 25% increase from 2008 to 2012. China has also built an enormous network of modern computerized grain storage facilities, with nearly 300 million metric tons of storage available. China was a net corn exporter from 2002 to 2006.
China knows GMO technology is critical to increasing crop yields, so investment in GMO technology has surged, despite public fears over negative health effects. Chinese officials are wary of becoming overly reliant on genetically modified seeds from the Western world. Within the last six months eight Chinese Americans and nationals have been arrested on accusations of corporate espionage and theft of American seeds. MIR-162 grain imports may not be allowed into China, but China desperately wants access to the technology that produced the MIR-162 strain.
With lower input costs and better technology, world corn prices have been lower than China’s domestic corn prices for years. For this reason, Chinese companies have imported significant amounts of corn. The easiest way for China to protect local farmers is to force the purchasing of Chinese corn by limiting the amount of foreign corn that enters the Chinese market.
Protection for local farmers, fear of reliance on foreign GMOs, and investments in agriculture are all part of China’s broader food security strategy. Banning U.S. corn for food security reasons is probably as strong an argument for why China banned U.S. corn as punishment for worsening relations.
With Sino-U.S. relations still very poor, another record corn crop this year in China, as well as Ukrainian, Brazilian, and Argentinian corn imports approved, no matter which reason you favor for the ban on American corn products, there is little reason to believe China will lift that import ban any time soon Every day it becomes more likely that only a significant and public response from the United States government, or litigation in the World Trade Organization, will open China back up to US corn product imports.
* Lucas Blaustein is the Container/Feed Ingredient Sales and Marketing Manager for CGB Enterprises. He has a Masters of Agribusiness degree from Texas A&M, and a Bachelors of Economics and Chinese Studies from the University of Houston. Lucas has worked in business and academia domestically and in China with major agribusiness companies like PepsiCo and John Deere and he is fluent in spoken and written Mandarin.
In parts one and two of this series, I wrote about the “flexible” working hours system as an exception to China’s standard working hours system. China’s labor law and relevant regulations also provide for a second exception: the “comprehensive” working hours system. The latter system applies to three categories of employees who work longer hours because of their particular industries, as follows:
(1) employees required to work extended hours in the transportation, aviation, railway, shipping, fishing, postal and telecommunications service industries;
(2) employees subject to seasonal and natural constraints in the resource exploration, construction, salt production, sugar production, and travel industries; and
(3) other employees in positions that may be suitable for the implementation of the comprehensive working hours system.
Before implementing the comprehensive working hours system, an employer must obtain written permission from the local labor bureau on two fronts: general permission to implement the system, and specific permission for each specific employee designated to work under the system. Once implemented, the designated employees’ working hours will be accumulated over a given period (i.e., a week, month, quarter or year), called a “comprehensive calculation period.” During each such period, the employee’s hours for a month may exceed by up to 36 hours what would have been allowed under the standard working hours system. (In practice, the overtime calculation is even more employer-friendly, as labor bureaus typically define the maximum allowable hours as the employee’s average hours for a month.) Employers who disregard overtime rules risk significant penalties: 150% of an employee’s normal wages for any time exceeding the legal maximum, and 300% of normal wages for such time occurring on a Chinese legal holiday.
The above rules leave several details open to interpretation, and to help clarify matters, in May 2012 China’s Ministry of Human Resources and Social Security issued Draft Regulations on Management of Special Working Hours for public comments. The Draft Regulations introduced the following revisions:
- Categories (1) and (2) above would be expanded to include the electric power, petroleum, petrochemical, and finance industries.
- Category (3) above would instead read: “in accordance with the industry policies issued by the State Council with respect to encouraged or promoted industries, the positions that the PRC Ministry of Human Resources and Social Security deems eligible for implementation of the Comprehensive Working Hours System.”
- The amount of allowable overtime would depend on the length of the comprehensive calculation period. For a period of one week, the maximum overtime permitted per period would be 15 hours (with an additional cap of 36 hours per month). For a period of one month, the maximum overtime permitted per period would be 36 hours. For a period of one quarter, the maximum overtime permitted per period would be 108 hours. For a period of one year, the maximum overtime permitted per period would be 360 hours. In addition, regardless of the period length, an employee could not work more than 11 hours per day, and would be required to have 24 continuous hours of rest every other week.
However, the Draft Regulations are still out for comment, with no end in sight. Unless and until they take effect, the comprehensive working hours system may only be used for employees who fit into one of the three categories listed at the beginning of this post.
Succeeding at doing business in China typically requires a good partner. The odds of having problems with a Chinese company will be substantially lower if you are dealing with a “legitimate” Chinese company. That means it makes sense for you to ascertain that you are dealing with a legitimate Chinese company.
But how do you go about doing that? How can you distinguish between a Chinese company that is legitimate and one that is not?
The following are the basics for making that determination:
- The first thing you do is ask the Chinese company to send you a copy of its business license. Do not be afraid to do this. Chinese companies do this all the time. If the Chinese company refuses to send this to you, walk away.
- You then have someone fluent in Chinese and with knowledge about Chinese business licenses examine the one that you have been sent. Our China attorneys typically look for the following:
- To determine whether it is real or not. This is done by comparing the information on the business license provided with the corresponding information on the relevant Chinese government website — usually the local State Administration for Industry and Commerce (SAIC). If the business license you have been provided is fake, you walk away.
- To see when the company was formed. We like to compare what the real business license says against what we were told (by email or whatever) and also what the Chinese company says on its English language and its Chinese language website. If different years are given in different places, we get suspicious and we ask more questions.
- To see where the company is located. We like to compare this against both what we were told (by email or whatever) and also against what the Chinese company says its English language and its Chinese language website. If there are different addresses in different places, we get suspicious and we ask more questions.
- To see what the scope of the Chinese business is, as listed on its registration. If the scope is “consulting” and our client thinks it will be ordering five million dollars of widgets from a factory, we get really suspicious. Looking at the scope is a good (though not always fool-proof) way to determine whether you are dealing with a manufacturer or a broker.
- To see the amount of registered capital. If the amount is too low, the odds are good that it is not a manufacturer. If the amount is really high, the odds are good that this is a big company. Note that this information is not going to be as commonly listed in the future.
Lastly, you should go visit the Chinese company or send someone you truly trust to do so.
Doing the above is not going to be nearly enough due diligence for big deals, but it is usually a relatively fast, relatively cheap way to get a good sense about the Chinese company with whom you are thinking of doing business. The above will not guarantee you a good long-term relationship, but it oftentimes will be enough to let you know whether or not you even wish to attempt to form any relationship at all.
The idea that video games can impart real-world skills has been around almost as long as video games themselves. In the forgotten 1984 film The Last Starfighter, a teenager masters a video game and is immediately recruited as a spaceship pilot—because the game was actually the proving ground for an intergalactic defense force. In the 1985 book Ender’s Game, the conceit is taken one step further: a boy genius wins a military simulation, only to learn that he was actually controlling Earth’s armies against an alien force. Meanwhile, the U.S. Army has been successfully using a video game to recruit soldiers for more than 12 years, and the Chinese, no slouches at either video games or cribbing good ideas, followed suit in 2011 with the PLA’s Glorious Mission (光荣使命).
Outside the context of fiction and propaganda, educational games (or serious games, as they are currently called) promise something they rarely deliver: education and entertainment at the same time. Most serious games are didactic to the point of not being fun; in others, the educational content is buried so deep that it barely registers—the gaming equivalent of putting spinach inside a brownie. Some years ago, I wrote about the challenges a Houston company faced in teaching children about healthy eating through video games, and little has changed since then.
I was therefore more than a little skeptical when the EU’s estimable China IPR SME Helpdesk announced they had launched a Serious Game (capitalization theirs) about protecting IP in China. According to the Helpdesk, the game “aims to offer a taste of the experience of doing business in China” and “will allow you to increase your knowledge and awareness about managing intellectual property when entering the Chinese market.”
I give full marks to the Helpdesk for trying something other than the usual litany of webinars, white papers, and blog posts, and to the EU for funding it. And while the game is not going to make anyone forget Grand Theft Auto, it is good enough that once you start, you want to keep playing until you win.
The narrative of the game is simple: you are a European company starting to manufacture and distribute products in China, and your goal is to make as much money as possible. The gameplay proceeds on a narrow trajectory—this isn’t The Sims: Chinese Factory (although that would be an amazing expansion pack)—and you learn quickly that your odds of success are higher if you make the “right” choices. For instance:
- If you don’t register your IP before using it, chances are good that someone else will steal it and you won’t have any recourse.
- If you don’t conduct due diligence on your Chinese partners, chances are good that you’ll end up doing business with a crook.
- If you don’t insist that the Chinese side sign an NNN Agreement, chances are good that your IP will be stolen.
- If you trust the Chinese side or an unqualified assistant to write a contract instead of a lawyer, chances are good that the contract won’t protect you.
- If you have documents translated into Chinese by the Chinese side or an unqualified assistant, chances are good that the translation will have glaring mistakes.
These lessons may seem self-evident, but our firm receives multiple inquiries every week from companies who have done exactly the opposite. Of course, it may be the case that such companies have never heard of either this blog or the China IPR SME Helpdesk until they get into trouble and type “China trademark help” into Google. But that’s a messaging issue. The game gets its point across, and it’s a point well worth making: if you do business in China without using either common sense or the protections afforded by law, you won’t last long. Indeed, we make the same point ourselves on a regular basis, including twice in the past two weeks (see here and here).
My biggest complaint about the game is its lack of robustness. It crashed multiple times on multiple platforms. But after the fifth restart, it struck me: the frustration I was experiencing was the same frustration that occurs when conducting business in China. Perhaps this is not a bug but a feature, and I should give the Helpdesk more credit for subtlety. Anyone who has worked in China knows that understanding the rules only gets you halfway. The rest comes down to perseverance.
(Many thanks to summer interns Emily Hackman and Trang Phan for their able game-testing assistance.)
I spoke at a seminar last week in Chicago on what companies that source their products from China need to be doing to avoid litigation. Number one on my list was to “choose a good Chinese partner.” I went on to say that the odds of having problems with a legitimate Chinese company are a lot lower when you deal with a “legitimate” Chinese company. I then talked of how legitimate Chinese companies do not like getting sued and will usually work to avoid that.
Needless to say, an attorney button-holed me to ask the next logical question: “how do you distinguish between a Chinese company that is legitimate and one that is not?”
My answer was along the following lines:
- The first thing you do is ask the Chinese company to send you a copy of its business license. Do not be afraid to do this. Chinese companies do this all the time. If the Chinese company refuses to send this to you, walk away.
- You then need to have someone fluent in Chinese and with knowledge about Chinese business licenses examine the one that you have been sent. Our China attorneys typically look at these for the following:
- To determine whether it is real or fake. We do this by comparing the information on the business license provided to us with the corresponding information on the relevant Chinese government website — typically the local SAIC — State Administration for Industry and Commerce). If the business license you have been provided is fake, you walk away.
- To see when the company was formed. We like to compare what the real business license says against both what we were told (by email or whatever) and also what the Chinese company says on both its English language and its Chinese language website. If there are different years given in different places, we get suspicious and we ask more questions.
- To see where the company is located. We like to compare this too against both what we were told (by email or whatever) and also what the Chinese company says on both its English language and its Chinese language website. If there are different addresses given in different places, we get suspicious and we ask more questions.
- To see what the scope of the Chinese business is, as listed on its registration. If the scope is “consulting” and our client thinks it will be ordering ten million dollars worth of widgets from a factory, we get really suspicious. Looking at the scope is a good (though not always fool-proof) way to determine whether you are dealing with a manufacturer or a broker.
- To see the amount of registered capital. If the amount is too low, the odds are good that it is not a manufacturer. If the amount is really high, the odds are good that this is a big company.
Doing the above is not nearly enough due diligenc for big deals, but it is a fast, relatively cheap way to get a much better sense about a Chinese company. Just the above is not going to be enough to guarantee a good long-term relationship, but it oftentimes is enough to let you know that you do not even want to attempt a short-term one.
For more on China due diligence, check out the following:
- China Business Due Diligence
- How To Conduct China Due Diligence. Just Ask.
- Doing Business In China Safely. The Due Diligence Basics.
- China Due Diligence. Cause It Really Really Really Matters.
- Buying A Chinese Company? Why China Deals DON’T Get Done.
- China Due Diligence. Not Optional.
- Seven Rules of China Due Diligence
- China Due Diligence. It Is Different.
- Let Me Tell You About China Due Diligence
- Giving China Due Diligence Its Due
- China M&A. The Extreme Basics On Due Diligence.
- How To Really Really Investigate A Chinese Company
- Giving China Due Diligence Its Due, Part II. Don’t Be A Sucker.
It has been about a month since China’s police accused GlaxoSmithKline’s former head of China operations of making illegal payments to Chinese doctors to boost GSK drug sales. Last fall witnessed the high-profile trial, conviction, and life sentence of Bo Xilai, the former head of the Chongqing Communist Party, on bribery charges. These two cases send a clear warning: Beijing is cracking down on corruption. Hard.
The GSK case shows that China will not tolerate corrupt activities by foreigners in sensitive industries, especially when such activities result in higher consumer prices. Beijing going after a foreign company for allegedly increasing health care prices is a smart political move, especially since the Chinese web is rife with complaints about exactly that.
But at the same time, it has become clear that Beijing is serious about rooting out corruption. The Party leaders in Beijing know that widespread corruption weakens their legitimacy and they are looking for ways to combat it. The important link between the Bo Xilai and the GSK cases is that they both involve defendants — a political elite and a foreign entity — whose arrests have engendered widespread discussion and sent a strong signal that no one in China is safe from prosecution. While Westerners are mostly complaining about the GSK arrests (multiple GSK employees have been arrested in addition to its former head of China operations), the Chinese internet is mostly loving it.
As a foreign company doing business in China, how should you react to the recent corruption crackdown?
First, resist the temptation to assume that China’s corruption crackdown is a bad thing for your business. China absolutely does engage in selective enforcement of its laws and foreigners absolutely will bear the brunt of that selective enforcement. But having said this, we are not aware of a single instance where the Chinese government has imprisoned an innocent foreigner or shut down a foreign business that fully complied with Chinese laws. In other words, if you scrupulously abide by Chinese law, you should be just fine, and stricter enforcement of China’s own anti-corruption laws should actually level the playing field between those who operate legally and those who do not.
Second, do not waste your time complaining about Chinese rules and regulations. The laws are what they are and your job as a foreign company doing business in China is to comply with them. American and British companies are already required to obey their own countries’ anti-corruption laws — the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act — that prohibit corruption globally, including in China, and so you really have no excuse for not already having an anti-corruption compliance program. However, you also should know that China’s anti-corruption laws are in at least some ways stricter than U.S. and British anti-corruption laws, so you cannot just assume that you are in compliance with China’s laws simply because you are complying with your home country laws. You must familiarize yourself with China’s anti-corruption laws and follow them as well.
Third, and most importantly, if your company has commercially benefited from actively or passively engaging in corrupt activities related to China, you need to immediately switch to operating a legally compliant business or you leave China.
You need to review what your China operation is actually doing (not what you sitting in New York or Los Angeles would like to believe it is doing) to ensure that your company is truly complying with Chinese law. I love telling of how a Beijing consultant I know listened to his client bragging on the phone of how his China operations were “100% corruption free” and then a few hours later (while sitting in the reception area waiting for his client to come out for lunch) heard one of that client’s employees engage in a bribery transaction.
And do not bother trying to justify violations by arguing that China’s laws are vague or that because other companies in your industry have gotten away with proscribed activities, you can too. Though both arguments may once have been true, in today’s China, any commercial gains from corruption are now outweighed by the legal and business risks. China has issued a clear directive that foreign companies bear the responsibility for ascertaining, understanding, and complying with applicable legal requirements and it is your job to heed that call.
All of this means that comprehensive compliance procedures are the new business norm in China. Note the word comprehensive; doing an internet search on your China employees and the Chinese companies with whom you conduct business is barely even a first step. You must know your employees and your Chinese counterparties thoroughly and that could mean months of due diligence investigations and document review. You then need to stay current with your knowledge through regular reviews.
China has made clear the risks of not complying with its laws. Your job now is not to complain, but to comply.
Just read this Harvard Business Review article on “How to Negotiate with Someone More Powerful than You” and could not help but be reminded of almost every Chinese negotiation in which I have been involved. Scratch that. Every Chinese negotiation in which I’ve been involved.
When foreigners come to do business in China, it is easy to forget how unbalanced the power is at the negotiating table. We’re in their house and things are complicated and weird. However, the Chinese enjoy, and are quite good at making us want to check our brain at the door. For more on this, check out Doing Business With China. The Ten Keys and Take Your Brain With You, Or How NOT to Handle Your Chinese Legal Matters.
Though the HBR article did not address China, the following points (with my liberal additions) are particularly useful as a guide for working in China
- Buck yourself up. If the jet lag, food, smells or lack of English are causing you some apprehension or making you feel a bit less sharp than usual, take time to focus on why you are here, and get psyched up for the day.
- Understand your goals and theirs. Research what the Chinese side actually wants from its potential deal with you. You can be certain that the Chinese party will mask at least some of their underlying goals and negotiate from their strong position of home field advantage. Use some Art of War “position awareness” tactics yourself. Often, you should disregard a lot of what they are saying, and if you can know where things are really heading, it will let you form your own strategy and safeguards to help ensure you get what you want.
- Prepare, prepare, prepare. Preparing in the right areas is key here. You know your business better than anyone, and you likely have thought through many of the important details you want in the deal. My law firm constantly gets contacted by American companies who want us to confirm their worst suspicions about their China deal partners after the contract has been signed or the money has been paid. I should not have to tell you but the time to conduct due diligence and an FCPA compliance check on your China partner is before you sign, not after.
- Listen and ask questions. I love how the article points out that “If they can’t defend it, you’ve shifted the power a bit.” This is what direct questions do in weeding out poor quality Chinese partners. If you get unspecific and/or evasive answers (like the classic phrases “No problem” or “Don’t worry about it”) you know something is up. There is always a chance you are dealing with an underling who does not actually know the answer to something, so be careful in your assumptions. But, if you ask about the person listed as the Chinese company’s Legal Representative or what the name of the company will be on the contract (or who owns it), and no one knows or is willing to tell you – you do have a problem.
- Keep your cool. The Chinese are expert at playing to a foreigner’s ego. You are not a great karaoke singer nor is your Chinese that good and if you are getting compliments for this sort of thing, you should realize that it is because the Chinese company wants something from you. Remember that you are there to make a good deal, not to prove how adept you are with foreign travel.
Does this match with your China negotiation experiences?
For more on negotiating with Chinese companies, check out the following:
- How To Handle Chinese Negotiating Tactics
- How To Handle Chinese Negotiating Tactics. Part Two.
- How To Handle Chinese Negotiating Tactics. Part Three.
- How To Handle Chinese Negotiating Tactics. Part Four Of Three.
Editor’s Note.This post was written by Arlo Kipfer, who recently joined our law firm as a paralegal. Arlo is fluent in Chinese and has been helping foreign businesses in China for the last decade, with particular expertise in bringing foreign-owned entities into compliance with Chinese law and policy. He has managed regional sourcing offices for publicly traded companies, conducted supply chain review and realignment, and negotiated with a wide range of local, regional and provincial officials. Arlo will be splitting his time between Shenzhen and Shanghai and, as a key part of our China compliance team, will be assisting clients with negotiations, factory due diligence, employee training, and other compliance matters.
Just read a fascinating/spooky article by Reuters Shanghai reporter, Adam Jourdan, entitled, Spooked by probes, pharma executives ask: should I leave China? Here’s our easy answer: if you are worried about getting arrested in China for something that your company has done, you should leave. Now.
The article starts out talking of how China’s recent and ongoing “crackdown on corruption in the pharmaceutical sector has frightened foreign executives so much that some fear they could be jailed and have asked their lawyers if they should leave the country for six months. Others are thinking of going for good.”
We keep hearing (from a wealth of sources who tend to know about such things) that corruption among the foreign (and the domestic) big pharma companies is rampant in China and has been for some time. Yes, pharma executive, you can argue all that you want that you had nothing to do with it, but if your company sales in China have increased 250% in the last five years and think that just maybe some of the people in your company might have been making payoffs, you are a risk in staying in China. But I am guessing that you already knew that.
Our China lawyers are often asked by our clients who allegedly owe money to a Chinese company about ”the risk” of their going to China or as to the “percentage likelihood” of their having a problem if I go.”When I am asked these questions, I typically answer with something like the following:
I cannot access the risk of your going to China and I certainly cannot put a percentage on the likelihood of your getting taken hostage. But I can tell you that your going there does involve risk and I can also tell you that our China lawyers have handled a shocking number of hostage situations for people held for not paying company debts, most of which were not even really owed. And I have a friend who works for a leading risk management company in Shanghai and he tells me that office deals five to six times a month with foreign hostages held in China over debts — and that is just in the Shanghai area!
So your going to China absolutely does create a real risk. But will you have a problem on this particular trip? I have no idea.
I can tell you that your risk will be lower if you just go to Shanghai or Beijing and that your risk will be considerably higher if you go meet with this company (to whom you owe the debt) on their home turf, in their small city where they probably have a tight relationship with the local police.
But what it really comes down to is that if it were me, I would not be going to China right now. I just value my freedom too much to take on a risk like this. The consequences are just too high and I would not go. But in the end, it really is up to you.
For more on hostage taking in China, check out the following:
- The Single Best Way To Avoid Being Taken Hostage In China.
- Shanghai Thugs Forcibly Remove Shanghai Residents. Why This Matters For YOUR Business
- Bo Xilai’s Lessons For Your China Business,
- China Business. China Jails. China Hostages.
- How Not To Get Kidnapped In China
- China Hostage Situation. Now IS A Good Time To Pay Your Debts
- How To Avoid Getting Kidnapped In China. Plan In Advance Or Go Home
Our advice to those whose companies have done something illegal in China is similar.
We have gotten many a call from Americans working in China concerned about how their company “may be” engaging in illegal activities. Our advice is usually something like the following:
You can pay us a lot of money for us to investigate exactly what it is that your company is doing and what your risk is as the _______ at the company and then research the law surrounding such actions and the history of people in similar situations.
But oftentimes, this research is inconclusive because what is happening in Shanghai might not be happening in Beijing, and vice-versa. And what has happened in the last three years might not be a good predictor of what will happen in the next three months. So really, in the end, it may all be up to you. You are best positioned to know what your company is doing and if you need help on the law side, we can and should provide you with that. Are you comfortable staying? Are you confident that if the police were to knock on your door you could avoid criminal charges because you are completely innocent of having done anything wrong?
I like to conclude with the following kicker:
Here’s something that should comfort you. Though we [our China attorneys] have seen quite a few companies and quite a few people get in trouble for not complying with China laws, we have yet to see any company get shut down or anyone go to jail if they did not violate Chinese law. So if both you and your company have done nothing wrong, the odds are good that you will be fine. But of course there are no guarantees in China, or anywhere else for that matter.
In the end, YOU are the one who knows what you and your company have done in China and if your gut is telling you that there is a problem, there probably is. What I can tell you is that there is usually a lot of “chatter” about foreigners who get arrested in China before they get arrested. Usually that chatter involves expats agreeing that what so and so is doing is illegal, but one side usually argues that China does not care and will never care and the other side considerably more dubious. My favorite line is a Yogi Berra-ish “China doesn’t care, until it does, and none of us have any clue as to when that shift will occur.”
The way big pharma operates in China has long been the topic of discussion, some public:
Even before then, executives were getting worried about a wave of visits from police and regulators to their offices as well as articles in Chinese media alleging corrupt practices against many global drugmakers.
Needless to say, all of this has “prompted some senior executives to look at all contingencies”:
“Many of our clients are asking about personal liabilities and insurance, with executives asking if they are put in jail what will happen to their families and how the company will provide protection for them,” said John Huang, Shanghai-based co-founder and managing partner at law firm MWE China.
* * * *
Huang and two pharmaceutical executives said some managers were reconsidering the legal risks involved in holding any position where they were responsible for some of the thousands of marketing and sales staff that global firms employ across China.
Lawyers said some executives and in-house counsel had sought legal advice about leaving China to avoid getting caught up in any future probes. Some top managers were actively pursuing career options outside China, said one source.
Others were contemplating a more temporary escape until the worst blew over.
“They are thinking about leaving China short-term, staying out of the country on a three or six-month rotation,” said another Shanghai-based lawyer, who asked not to be identified because of the sensitivity of the subject.
By moving abroad, executives would avoid being arrested should there be any formal investigation into their firms, lawyers said. Executives had sought advice on relocating to Singapore, Hong Kong and other destinations, they added.
Some international firms were also finding it harder to attract staff to China, said the two pharmaceutical executives at separate global drugmakers, who declined to be identified because they were not authorized to speak to the media.
Amazingly enough, some claim not to see increased risk:
Other executives believe the GSK case is a one-off event and are more focused on not falling foul of the U.S. Foreign Corrupt Practices Act (FCPA), which can apply to a wide variety of firms that have business ties to the United States.
I have yet to talk with anyone doing substantial business with China who is not convinced that China is serious about clamping down on corruption. There is dispute about how China chooses its anti-corruption targets, but there is no dispute that this anti-corruption drive is very real and will not be ending soon. The article reflects this latter view by stating noting that “[t]he crackdown, which shows no sign of abating, coincides with a wider campaign by President Xi Jinping against corporate and official graft.”
Or to cite CLB’s own Steve Dickinson quote in the article:
That would be a mistake [thinking GSK is a one-off event], said Steven Dickinson, partner at law firm Harris Moure in the Chinese port city of Qingdao.
“Every week I write an email saying you’re missing the point – you won’t have time to get hit by the U.S. law because you’ll be in jail in China,” Dickinson said.
If you are doing business in China or with China and you have any concerns about you or your company getting into trouble for corruption, you should read the following and you should institute a China corruption compliance program right now (our phone lines are open!). Actually, let me rephrase that, if you are doing business with or in China, you should institute a China corruption compliance program right now and you should read the following:
- Your Job Is To Avoid China Corruption Charges
- China’s Anti-Bribery Laws Rising
- Lessons From The ChinaWhys Arrests: No Bribing. No PI Work. No Operating Illegally.
- China Bribery. A Few Facts And A Few Tips.
- Avoiding Chinese Jails. I’m Talkin’ To You.
- China Law Enforcement Efficiencies Rising
- China Corruption. Et Tu? Do You Even Know?
- U.S. Company Bribery In China: Violate The Law, Go To Jail
- Sanlu’s Lessons For Foreign Managers In China….Because Jail Is Probably Not Where You Want To Be
- The FCPA And China. Do I Need To Get All Loud On You?
- The Foreign Corrupt Practices Act. Can You Say China Relevant?
In China’s Forty Hour Work Week Is Mandatory. Except When It’s Not, I wrote of how China’s labor law permits a flexible working hours system for senior management as an exception to the basic work week rule (it seems most municipalities enforce a 40-hour work week). This system can benefit employers needing greater employee hour flexibility, without having to pay overtime every time their employees work outside the basic hours.
However, employers should proceed with caution.
First, even for employees under the flexible working hours system, employers are legally required to provide adequate rest time to these employees. Though “adequate rest time” has been left undefined in some jurisdictions (Beijing being one of them), some are clear on what they require by this. Shanghai, for example, requires employers provide at least one day every week as rest time for their employees designated under the flexible working hours system.
Second, you often cannot avoid paying overtime simply by implementing a flexible working hours system. Even in the case of a salaried employee system, some municipalities (Shanghai and Shenzhen immediately spring to mind) require employers pay 300% of an employee’s normal wages for time spent working on a Chinese legal holiday. For this reason, we tell our clients that the safest approach is for them not to have any employee work on Chinese national holidays, if at all possible.
It also needs to be emphasized that employers cannot use a flexible working hours system with low level management and non-management employees, unless those employees fall under one of the following five categories:
- offsite sales personnel
- personnel permanently based out of town
- long distance transportation personnel
- non-production on-duty personnel
- others in special work positions that may arrange their own work and rest schedules.
For example, it may be possible for you to secure approval from the local agency for your off-site sales managers or for your long-distance transportation employees who are constantly on the road, but note that you must secure the requisite permission from the authorities before you can apply a flexible working hours system to any employees who fall under the above five categories.
In May 2012, China’s Ministry of Human Resources and Social Security issued Draft Regulations on Management of Special Working Hours (“Draft Regulations”) for public comments. These regulations would have clarified various issues relating to the flexible working hours system. These Draft Regulations would have revised the above-mentioned categories by adding a new category: “employees in positions relating to technology, research and development, and creative work who may arrange their own work schedule with no attendance record requirement.” The Draft Regulations kept categories (1) and (3) above, as well as senior management, as positions eligible for the flexible working hours system.
But these Draft Regulations have yet to take effect and until they do, the existing regulations are what apply, and as far as non-senior management employees are concerned, you can only use the flexible working hours system with those who fit into one of the five categories listed above.
This year, Mathew will be moderating a panel at the Annual Australia-China Film Industry Forum on Tuesday June 17th. This panel will be discussing new opportunities for sino-foreign co-productions, with panelists Susan Xu, Vice General Manager, China Film Coproduction Corporation, Tony Zhang, Vice President, DMG Entertainment, and Director/Producer Pauline Chan.
Moderators of other panels and roundtables taking place at the Forum include Ellen Eliasoph, President and CEO of Village Roadshow Entertainment Group Asia, and Geng Ling, Managing Director, Soundfirm Beijing. The Forum will include delegates from Fox Studios Australia, Animal Logic, Film Australia, and a wide range of other production, post-production and digital effects executives.
For more information about the Australia-China Film Forum contact the Australian Embassy Beijing
The Forum follows closely on from the New South Wales Screen Industry Beijing Roundtable, an industry event that took place last month during the China Beijing International Fair for International Trade in Services (CIFTIS). Mathew participated in a roundtable discussion at that event along with Wayne Borg, Managing Director, Fox Studios Australia, Ron Saunders, General Manager, Beyond Productions, Australia, Geng Ling, and moderator, Grainne Brunsdon, Manager Stakeholder Relations, Screen NSW.
With China movie box office and movie attendance both growing at around 30 percent year-over-year, we are expecting both good attendance and much excitement at both this year’s SIFF and at the Australia-China Film Forum.
Every so often we get calls from companies either in the process of raising funds on Kickstarter or just having completed their Kickstarter fund-raising.
Almost invariably, our conversation goes something like the following:
Company with product: We just raised money on Kickstarter and we have lined up a China manufacturer for our product and we are thinking it is time to get a China lawyer involved, though we do not have much money for legal yet.
Me: Well, if you are going to spend money on anything, the most important thing is your intellectual property.
Company with product: We figured we would deal with that later. Right now we just want someone to review our NDA and then review the manufacturing contract we will be drafting.
Me: Who drafted your NDA, an attorney with China experience.
Company with product: No, we did it ourselves. It really just needs a quick review.
Me: I have never seen a self-drafted NDA that just needs a quick review for China. To work for China, you need a China NDA, which we actually call an NNN Agreement. NDAs are geared towards preventing disclosures of information but your biggest risk in China is typically not going to be your manufacturer disclosing your information; it’s going to be your manufacturer stealing your product and selling it worldwide and to your own customers. Also, to be effective, the NNN Agreement should be in Chinese and it should contain liquidated damages provisions. There are all sorts of other things that need to go into it as well, but these are the basics. The same holds true for an OEM Agreement. But really, my biggest concern is your IP.
Company with product: Well, to be honest with you, when we listed the risks on our Kickstarter, we said that the risks were manufacturing delays. We didn’t even mention our IP and so I don’t see how we can pay you anything right now to protect that.
Me: Well, if you cannot afford to protect your IP, it is probably not worth your money to pay for contracts. I mean why spend money for an NNN to protect yourself against a few companies — your potential manufacturers — when you are not able to spend money to protect yourself against the millions of other people out there who could steal your product. And as I hinted, we will need to start over on these contracts, using your draft contracts for nothing more than to determine certain facts regarding what you are doing. I really think that you should at least register your key trademarks.
Company with product: Yeah, well, I’ll talk all of this over with my partners.
I am writing on this now because twice this week I have received calls from “companies with product” who are now encountering serious (and expensive to remedy) difficulties arising from their failures to button down their IP protections when we spoke a year or two ago.
Bottom Line: Failing to protect IP early on is probably the most common mistake made by start-up companies.
Our law firm’s lead China lawyer, Steve Dickinson, is based in China. Those who know Steve know that he does not pull punches. Ever.
Our China law team (based as we are in at least three different cities at a time, but usually far more than that due to travel schedules) are constantly communicating via Yammer, Skype, text, and email, depending on the nature of the communication, the urgency of the communication, the people involved in the communication, and even the time of the communication.
I woke up this morning with the following team email from Steve, and though we usually edit (i.e. weaken) Steve’s emails, this one needs to be seen in its (nearly) unvarnished state:
1. Here is a news article on the metals probe. [Which our China lawyers had been discussing]
2. The investigation is taking place in Qingdao. [Where Steve is located]
3. The investigation has come from the PRC authorities.
4. The whole thing [allegedly] concerns a corrupt illegal system that makes use of fake import/export documentation. This system is now being attacked by the government and is being unwound.
5. The point: the days are over where companies can assume that this kind of illegal activity will be tolerated in the name of business as usual. The days where American companies can even think of making the claim that fake import/export documentation is just “doing business as usual in China” are over.
6. As a peripheral matter, this also shows that much of China’s reported trade in commodities is falsely reported and as this whole thing unwinds, it could have a major impact on the analysis of world trade flows. If all that copper comes on the market, it could destabilize the metals markets. Other commodities markets will follow: for example, soybeans and corn.
7. The current problems we are facing with [client A and client B] is part of the same theme: China is getting serious about cleaning up. These are real issues. The old notion of: “everyone in China acts illegally, so no one will get arrested,” is no longer applicable. This is not a matter of the occasional arrest of a random person. This is a systematic move by the authorities to clean up.
8. We need to keep emphasizing this to our client and to our readers and if they do not want to listen, they will be making that choice at their own peril. At least we can take comfort in having tried to protect them.
What do you think? Alarmist or prescient?
The IPR Insider had an interesting post the other day, entitled, We don’t need an IPR strategy for China…., noting how many foreign companies still have the following misconceptions about IP in China and how those misconceptions can hurt them.
The post starts out with the misconception that abecause “I do not sell in China or Asia…I only need basic protection.” Now before I go along with IPR Insider on how dangerous this misconception can be, I do have to note that there is some truth to it in that if you are not selling your product in China AND you have no intention of ever selling your product in China, your IP protection needs in China could be minimal.
A few examples bear this out.
If you are selling a food product in just Oregon state and you may sell it in Washington State or in California some day but you will never sell it anywhere else, you really do not need to worry about China IP protection. You just don’t.
If you are having a clock radio manufactured in China under the brand name Clockey and you are manufacturing that clock radio in China but selling them in just the United States with no plans of ever selling it outside the United States, you would probably be fine just registering the Clockey name for either clocks or radios, but there is little need for you to register the name for both clocks and for radios. This is because your goal in registering the Clockey name at all is a defensive one. In other words, your reason for registering the name Clockey is to prevent someone else from registering the Clockey name and then stopping your Clockey clock radios from leaving China because your clock radios violate their China trademark. But if you are selling your Clockey clock radios in China you will want to register the Clockey name under both clocks and radios because you will want to be able to stop anyone else from selling either Clockey radios or Clockey clocks or Clockey clock radios in China and to be certain of being able to do that, you need to register the Clockey name for both clocks and radios. This would be what is known as an offensive radio.
Now that we have that out of the way, I agree with IPR Insider, when it says that “this misguided notion applies to both those who manufacture in, but sell their products outside of China, and those who have no operations within the country but produce something that has potential for the Chinese market.”
The IP Insider post also does a great job explaining why “automatic” copyrights in China are less valuable than they initially might seem:
Copyright protection is commonly seen as the most basic protection one can have, and in the majority of countries (including Europe) it’s automatic and does not require registration – only the clear assignment of the creator or rights holder. It is free and easy, and will protect creative works and designs.
For China, however, it should be noted that a copyright registration facility are available in addition to automatic protection. And there is good reason to make use of this.
IPR Insider goes on to note that “automatic” copyright protection will “in theory” protect your copyrights, but in practice it does not usually provide “the same level of protection” as if you had actually registered it.
IPR Insider then talks of how companies wrongly think that because their trademark is not well-known, that the risk of it being infringed upon or simply taken outright is minimal. IPR Insider rightly notes that IP infringement and usurpation is rampant in China and all unprotected brand names are vulnerable to usurpation. I would add that if this were not the case, my law firm’s China IP lawyers would have a lot less China IP work to do because they spend a lot of their time dealing with counterfeiting and IP infringements and IP usurpations involving trade names of which few people are aware.
For more on China IP protection and infringement, check out the following:
- How To Respond To China IP Infringement. Watching The Sausage Get Made.
- Having China IP Problems? Whose Fault Is That?
- How To Protect Your IP From China. Part 1
- How To Protect Your IP From China. Part 2
- How To Protect Your IP From China. Part 3
- How To Protect Your IP From China. Part 4
- How To Protect Your IP From China. Part 5.
A couple emails between one of my firm’s clients and one of my firm’s China lawyers just landed in my in box. The email from the client asked the following:Do I need to have a business license to sell our products in China? Someone recently told me that we do, but I was under the impression that we do not. Could you clarify for me? Our China lawyer answered as follows: With respect to your question about the business license, it depends on what you mean by “sell in China.” A Chinese business license is for companies that are resident in China. If you open up a retail store in China and sell goods, you will need a business license. If you are simply shipping product to a third party in China, you do not need a business license. I deem these emails to be “blog-worthy” both because we are often asked this question and because there are a number of people out there claiming that one must have a business license to sell product or services into China. As you might expect, a number of those who say that a license is necessary follow that up by telling you what they will charge to get you one, which basically requires that you form an entity in China (like a WFOE) to be able to get the license. I have seen too many American and European companies form a company to do something in China that they could have done from America or from Europe without the need for a China entity at all. There will oftentimes be marketing benefits from having a WFOE in China, but a WFOE is not always necessary. Just thought that you should know.