After the month it just had, Apple is probably sick of hearing T.S. Eliot references. First China cut off access to iTunes movies and books. Then Apple reported a 26% drop in quarterly sales in China, Hong Kong, and Taiwan, after which Apple’s stock price took a header. Topping it all off, last week China’s Legal Daily reported Apple’s defeat in a trademark-infringement case, in which the Beijing Municipal High People’s Court upheld the validity of Xintong Tiandi Technology (Beijing) Co., Ltd.’s trademark application for “IPHONE” covering leather goods such as handbags, belts, and yes, cellphone cases. This decision was an affirmation of a Dec. 16, 2013 decision by the Trademark Review and Adjudication Board (TRAB).
Apple’s chief argument in the trademark case was that “IPHONE” is a well-known trademark in China, and therefore any third-party registration – regardless of the product or service – should be invalidated. The TRAB and the Chinese court both rejected this argument, and if you look at the timeline, it was a fairly easy call.
Apple had submitted a trademark application for “IPHONE” on October 18, 2002, and received a registration on November 21, 2003. This trademark registration was in Trademark Class 9 only, covering computer hardware and computer software. Apple first announced the iPhone in public on January 9, 2007 at the Macworld Expo in San Francisco. The first iPhones were available later that year in the U.S., but did not arrive in China until October 30, 2009, after Apple signed a deal with China Unicom.
Meanwhile, on September 29, 2007, Xintong Tiandi Technology (Beijing) Co., Ltd. submitted a trademark application for IPHONE in Class 18 for leather goods.
The only question before the TRAB, and the Beijing Municipal High People’s Court, was this: was “IPHONE” a well-known trademark at the time that Xintong Tiandi filed its application? As we have discussed numerous times (see here, here, and here), it is extremely difficult to prove you have a well-known trademark in China. Generally speaking, to succeed at this, the mark needs to be widely known to the general public in China. And in October 2007 — two years before the first iPhone was sold in China — the mark “iPhone” was not well-known to China’s general public. Accordingly, Apple was held to have had no basis to invalidate Xintong Tiandi’s trademark application.
We can take a few simple lessons from this case:
- If you really don’t want to see your trademark on some random products in China, submit a trademark application to cover more products than what you will be selling. Starbucks has done a great job with this “offensive” strategy in China, filing trademark applications in all 45 classes of goods and services. For brand-conscious companies, this is just the cost of doing business. Would you rather see “your” brand on a line of diapers or lawn furniture? And it almost always makes sense to file for China trademarks in China, not in Madrid. See China Trademarks. Register Them In China Not Madrid.
- Regardless of what you might think, your trademark is almost certainly not well known in China. There are only a handful of non-Chinese brands that would qualify as well known trademarks, and they already have trademark registrations in China. You might have the most famous natural foods store in America, but in China, you might as well be a guy from Inner Mongolia with a backyard chicken coop. You think I just made that up, but I just checked the CTMO website out of curiosity and someone from Hohhot has in fact registered a trademark for “Whole Foods Market” to cover eggs. Just eggs! There’s got to be a story there. See Think You Have A Well Known China Trademark. Think Again.
- If you’re going to file trademark applications in China, do it before you make a big public announcement. The general public in China may not follow all the latest press releases, but you can bet someone in China does, and that someone could very easily file an application for “your” trademark before you ever come to market in China. This applies to movie studios announcing their summer tentpoles just as much as it does to tech companies debuting their new gadget. We’ve said it before and we will say it again. China is a first to file country and this means (with very few exceptions) that whoever files for a trademark first gets it. See Register Your Trademark In China: Now. Just Ask Mike.
- If you’re going to file a China trademark application early, don’t file too early. By filing in 2002 but not announcing its product until 2007, Apple exposed itself to a non-use cancellation action. If one of their competitors had bothered to check the CTMO database, they could have filed a non-use cancellation on “IPHONE” the day after Apple’s announcement in 2007, and then Apple would have been in deep, deep trouble. See China IP Protection: The Force Is Strong With This Blog Post.
Xintong Tiandi’s trademark application will proceed to registration on May 14, 2016, so in about a week you can buy an IPHONE cellphone case from Xintong Tiandi to protect your iPhone. Actually, you can buy one right now, but next week Xintong Tiandi can start legally using the ® symbol on its goods. The Quartz piece on this topic has some nice pictures of those goods, taken from Xintong Tiandi’s website. You might notice that Xintong Tiandi is already using the ® symbol. I guess they were optimistic.
China trademark problems. Don’t let them happen to you.
The post China’s Trademark Laws vs. the Biggest Company in the World, or Apple’s Cruelest Month appeared first on China Law Blog.
Our China lawyers are always asking our clients to secure a copy of their Chinese counter-party’s China business license because a quick review of that license so often provides us with valuable information. I was reminded of that today when I came across a 2012 email while doing a company search. This email is from one of our China attorneys to the client (I was cc’ed), setting forth what we learned just from looking at the Chinese company’s business license, a copy of which our client had.
Just by way of a bit of background, the license was actually for a WFOE (not a Chinese domestic company) and we were looking at the license because our client was trying to determine what had gone on with the Chinese WFOE that was owned by a US company in which it was an investor. I have stripped the email of any identifiers, but you can still get the point.
The China Business License you provided us stated as follows:
- Company name: _____________in Chinese]. No English language equivalent is given in the documents (which is unusual), but this translates as ____________(Beijing) International Trading Company Limited.
- Company address: Beijing City, Dongcheng District__________________. This is a prestigious location in the center of a high-end retail/office district.
- Registered Capital: $600,000 US. The amount is high because high registered capital is required for trading companies. A Chinese CPA must verify all registered capital contributions. You should obtain a copy of the verification. Note also that all WFOEs must undergo an annual audit and file an annual tax return. We should obtain a copy of the audit and the filed tax return(s).
- Representative Director: __________. This person has primary authority for all company operations. We should ensure that you have complete control over this person together with the company seals/chops, bank accounts/bankcards and primary company documents. We should also immediately determine 1) who is the general manager and 2) who are the members of the board of directors.
- Formation date: 8/–/2011. Inspected and approved: 9/–/2012. It is good that the company has been formally inspected. It means someone at the company is trying to follow proper procedure.
- Scope of Business: Wholesale for various consumer goods; financial and business management; import and export of goods and technology, including export-import agency. This is a very broad scope of business that allows for them to do consulting business in addition to trading. This is somewhat unusual and is a very good thing for you since it maximizes the flexibility of the WFOE. However, this scope of business does NOT allow the WFOE to operate as an advertising agency (see discussion below). On the other hand, the existing scope of business allows you to advise your customers on where and how they should place advertising and you can charge a fee for the service. You can also act as an intermediary in arranging with an advertising agency for placement. However, you cannot contract directly to place the advertising. Only an advertising agency can do that.
- Shareholder: _______________ Holding Company. This appears to be the proper shareholder.
Advertising Agency Issue. Here is a brief review of the advertising agency rules. To place advertising in China, a company must be a licensed advertising agency. Foreign companies are permitted to form a wholly foreign owned advertising agency but the rules for doing so are quite strict. The primary rule is that you must prove that 85% of your income over the last 3 years comes from advertising. How you “prove” this is not stated in the rules. There are also special rules for advertising companies related to staffing and registered capital that add extra burdens. The main issue, however, is the one I raised above. You cannot simply amend your current scope of business to add operation as an advertising agency as an additional item within the scope. Instead, you must form an entirely separate company, with a separate office address, staff, registered capital and the rest. As we discussed, you can, of course, enter into contracts between your Chinese entities that would allow you to offer an integrated package of services to your customers.
But beneath that integrated package you will need to maintain a strict separation between the entities. Thus the person who formed the existing WFOE trading company did not make a mistake with respect to the scope of business. Rather, no one has taken the additional step of forming the additional company that would act as an advertising agency
China (Shenzhen mostly) remains the primary destination for manufacturing of small electronic consumer products. And since Internet of Things (IoT) products are red hot, this means our China lawyers are getting a steady diet of China IoT legal matters.
The issue we see on a day to day basis is this: the IoT product has now reached the mass production stage and is being produced in large quantities. Now that it has a commercial product, the U.S. buyer now seeks financing for its young company. The financier (be it angel, VC, private equity, or even someone’s father-in-law) then asks: who really owns the intellectual property in the product? Do you own it, does the Chinese factory own it, or does some third party own it? It is always awkward for the (usually) young entrepreneur to answer that question. However, with the rise of the Internet of Things (IoT), the question has become even more difficult to answer in a definitive way.
How did we get to this point? The process has worked its way through three general stages:
Stage One. In the good old days (say 1981 to 1995), the situation was simple. There were two possibilities. In the first, the Chinese manufacturer made a standard consumer product. The U.S. buyer merely purchased that existing product and perhaps required the manufacturer take the extra step of placing the U.S. buyer’s own trademark/logo on the product. In that setting, ownership of the intellectual property was clear: the Chinese manufacturer owned the product design and the U.S. buyer owned its trademark/logo. In the second, the product was a long standing, well developed product of the U.S. buyer. The buyer brought the completed product to the Chinese manufacturer and contracted with the manufacturer to make a copy. In that setting, ownership of the intellectual property was clear: the U.S. buyer owned all of the intellectual property and the Chinese manufacturer owned nothing.
The simplicity of the relationship encouraged the lazy practice of documenting the entire manufacturing relationship through simple purchase orders. NNN agreements, product development agreements and OEM agreements were seldom used, since the IP ownership was clear and the price and delivery terms were taken care of by the purchase order. This lazy approach then led to the subsequent disasters resulting from product defects. But that is an issue for another post.
Stage Two. In stage two (1995 to 2015), a new form of relationship developed. U.S buyers began coming to China with no completed project in mind. Instead, they came to China with a product idea or proposal. The buyer then worked with the manufacturer to co-develop the product. In some cases the role of the Chinese manufacturer was simply to take a completed prototype and then commercialize that prototype for mass production. In these cases, the U.S. buyer arrived with little more than a very basic idea, and the two sides worked to co-develop the product.
Normally, the Chinese manufacturer offered to perform all of the development work at its own expense, with the implied agreement that the manufacturer would be the exclusive manufacturer of the product. This co-development process typically proceeded using the same lazy “purchase order only” approach from stage one. This lazy approach then has led to the typical issues we see today that make answering the “who owns what” question so difficult. In order to do the co-development process properly, the parties must define their relationship with three agreements: 1) NNN Agreement, 2) Development Agreement and 3) OEM Agreement.
Where these agreements do not exist, as is common, a set of standard issues arises: Who owns the product design? Who owns the molds and other tooling? Who owns the manufacturing know-how and similar trade secrets? If the buyer decides to have the product made by a different factory, what compensation is owed to the manufacturer who co-developed the product? What is the obligation of the manufacturer to comply with price and quantity requirements of the buyer? If the manufacturer terminates its relationship with the buyer and manufacturers the product under the manufacturer’s own trademark/logo, is this a violation? Absent clear, written agreements, all of these questions have very unclear answers. In that unclear situation, the Chinese factory will generally be in the strongest position and in the event of a dispute the Chinese factory will typically prevail.
Stage Three. In stage three (2015 to today), we arrive at the IoT era. In the design, development and manufacture of consumer products for the IoT market, the already unclear and problem-filled relationships of the stage two era have now become magnified. In the IoT era we are now just entering, a whole new set of issues has arisen. In the stage two era, there was at least the simplicity of two entities designing and/or manufacturing a single product. In the IoT era, the situation is much more complex. In most of the IoT projects we have seen over the last six months, the development process has expanded to include the following:
1. Product “concept” from the U.S. buyer.
2. Product external design, from an international design firm.
3. Internal design and function, owned by:
a. The U.S. buyer;
b. The Chinese manufacturer;
c. The provider of sensors and other components required to connect the IoT product to an outside network.
4. Design of the IoT product “app” (usually for a smart phone). This then involves two completely separate sets of software: the communication sending software residing on the IoT product and the communication receiving software residing on the application in possibly multiple forms. In the same manner as the internal design, these software components may be written/designed by multiple parties: the U.S. buyer, the Chinese manufacturer and (quite often) third party software design firms.
So now consider: the product is complete, manufacturing is ready to start, and the U.S. buyer goes out for funding. The funding source then says: who owns this IoT product? Who owns its underlying IP? What we have found when we ask the U.S. buyers is that they usually don’t know. And their initial backers and sourcing companies don’t know either.
As you can imagine, the “we don’t know” response does not sit well with sources of serious financing. Even worse, when the U.S. buyer is now pushed to answer the question, they more often than not find out that the answer is that it is not clear who owns the new product, but what is clear is that the one entity that clearly does NOT own the rights to the product is the U.S. buyer. Even worse, it is often not possible to fix the situation when this stage is reached.
So the message is that as the manufacturing setting becomes more complex, it becomes even more important to enter into clear written agreements that answer the obvious questions in advance. It makes little sense to devote time, energy and money on developing an IoT product that someone else will own.
For more on the issues we are saying involving China and the Internet of Things, check out the following:
- China and the Internet of Things: A Love Story
- China and The Internet of Things and How to Destroy Your Own Company
- China and the Internet of Things, Part 3 of 228
Got the below great comment/question today:
I would love to see you write about Taiwan / HK being “not” China, but from a different perspective. What advice do you give to a foreign company that plans to engage TW-based (or truly HK-based, e.g. been based in HK for 30-40 years) manufacturer, and said TW/HK company owns (though often, especially in the case of TW companies, via some Cayman/BVI/offshore entity) it’s own factory in China where the goods will actually be produced.
For many good business and tax reasons, the TW/HK company wants their HQ office to be the supplier of record to the foreign (e.g. US/UK) customer, and for the customer to pay the HQ office for the goods (usually so the factory can keep most profits outside of China and not have the problem of extracting money from China, which you write about so well).
So the US/UK customer will buy goods from (and pay money to) a TW/HK HQ operation, which in turn will sub-contract the manufacturing to their China-mainland subsidiary. In these cases, does your firm typically advise the client to have a contract with the TW/HK HQ, or solely with the China factory (even though they are not paying the China factory directly), or separate contracts with both entities?
You’ve written so much wonderful work on working with “Chinese suppliers” but in so many cases these suppliers are the product of FDI from TW or HK (or Korean, Japanese, US, German, etc) companies. Are the rules of Development Agreements and OEM contracts fundamentally different when a) the china factory has a foreign owner) and b) the customer will pay the foreign owner (rather than factory directly) for the goods?
It is a great question because the situation of a foreign company operating a Chinese factory has become so common and it presents legal problems just about every time it shows up. This issue usually shows up when a Hong Kong (most commonly) or a Taiwan company wants the OEM agreement (a/k/a the manufacturing contract or the supplier agreement) to be with it and not with the Mainland China (PRC) company that owns the Mainland China factory that will be manufacturing the product. I estimate that our China lawyers deal with this issue at least a third of the time when writing China manufacturing contracts, usually in one of the following three situations:
- The Hong Kong or Taiwan entity owns a PRC WFOE as its subsidiary, which WFOE in turn owns the PRC factory.
- There is no parent company-subsidiary link between Hong Kong or Taiwan and the PRC factory. Rather, all or some of the owners of the PRC factory-owning company are also owners of the Hong Kong or the Taiwan company. Or maybe the owners of the Hong Kong or the Taiwan company are simply part of the same extended family as the owners of the PRC factory-owning company.
- There is no ownership connection between the Hong Kong or the Taiwan company and the Chinese factory. The Hong Kong or the Taiwan entity is simply a broker for the Chinese factory.
Though it is nice to know the real relationship between the Hong Kong or Taiwan entity and the PRC factory, it usually isn’t critical for determining how to write the OEM contract. We generally like to see our clients’ OEM agreements be with the PRC company and not solely with the Hong Kong or the Taiwan company, for the following reasons, among others:
- If the manufactured product is of poor quality or delivered late, it is easier to threaten or sue the manufacturer.
- We want the payments to go to the company that actually owns the factory that is doing the manufacturing, rather than an interposed Hong Kong or Taiwan company that receives payment for the manufacturing and we want the OEM agreement to reflect this. This is because there is always the possibility that the PRC factory will claim it was never paid by the Hong Kong or the Taiwan factory to use that as a reason for refusing to manufacture for our client. Yes, this problem can be dealt with by contract(s), but doing so complicates things.
- Our OEM agreements almost always contain non-disclosure, non-compete and non-circumvention provisions. See China NNN Agreements. The PRC manufacturer (not the company in Hong Kong or Taiwan) is best positioned to manufacture and sell our clients’ products in competition with our client. We therefore very much want that manufacturer to have signed a contract that prevents them from doing such a thing.
- We know the PRC manufacturer has assets because we know it owns a factory. Oftentimes the Hong Kong or the Taiwan company has no assets beyond a rented office with a few chairs, desks and computers. We would much prefer our client have contract and litigation leverage over a company with a factory than a company with some chairs. Also, a company with a factory is more likely to abide by a contract so as to avoid being sued than a company with some chairs.
For more on why it almost always makes sense to contract with your PRC manufacturer, check out China Product Outsourcing. How To Distinguish Between An Agent And A Manufacturer and China Contracts, But With Whom?
The post Who Should Sign Your China OEM Agreement? Not Some Hong Kong Company if You Can Help It appeared first on China Law Blog.
Saw the following comment today and thought it would make sense to respond via this blog post, rather than directly:
I never seem to have any luck getting a response on Facebook so I’ll repeat a query here: is it legal to pay the standard 13th month bonus without specifying it in the labour contract? My understanding was that the annual bonus is discretionary, unless you make it otherwise.
We have written 3,865 posts and almost all of them get some comments. Some get a lot of comments. Some get more than 200 comments. Many of those comments are questions. We review the comments to determine whether they are spam or not and if they are not we post them — with a few very rare other exceptions. See China Law Blog Commenting Policies.
Our China lawyers simply do not have the time to read and respond to all of the comments. Sorry.
We are always going to be reluctant to respond to comments that seek from us what is essentially a legal opinion, like the one above. In large part because there is seldom an easy answer for legal questions. Why do you think lawyers charge by the hour?
First off, what is meant by “without specifying it in the labour contract”? Specifying that the 13th payment is discretionary? Specifying that any 13th payment is discretionary? Or not saying anything at all about a 13th payment. These three things can be very different.
If the contract mentions a 13th payment but says it is discretionary but the employer has made the 13th payment for the last 20 years and has on many occasions told its employees that they can expect it every year, how discretionary is it? Has it now de facto become mandatory? Can you see why this situation might be different from a situation where the contract makes very clear that the employer may from time to time make a 13th payment but that doing so expressly does not waive its right not to make a 13th payment and that employer only makes a 13th payment every few years? Can you see why both of these might be different from a situation where the contract is completely silent about a 13th payment but the employer has made one every year for twenty years or has made one only every few years? The comment itself implicitly seems to recognize this, by stating the belief that the 13th month is discretionary, unless the employer makes it otherwise. Our job as attorneys is to determine whether the employer has “made it otherwise.”
Many times our clients tell us their contracts say one thing when they actually say the opposite. Many times our clients are working with an English language contract that says one thing when the official Chinese language version says another. Many times our clients think they have an enforceable contract when under Chinese law they really don’t. See How to Draft a Contract for China. Many times our clients think they don’t have an enforceable contract under Chinese law when they really do. See China LOI and MOU: Don’t Let Them Happen to You. Does this commenter have enforceable written labour contracts with his employees or not? Are those contracts in just English or just Chinese? If they are in both languages, are they clear about the official language or are they explicitly dual-language contracts? All of this could influence both what this commenter wrote to us and, more importantly, the legal reality.
And then there is the fact that so much of China’s employment laws are local. See China Employment Law: Local and Not So Simple. Maybe Shanghai treats this situation (and again, we do not even know what the situation really is) completely differently than Qingdao. Even if we did know where this person is located, we could not answer unless we had that very week answered the very same question with the very same relevant facts in the very same city, unless we were to spend hours reading the local rules for this person’s particular city and then spend more time trying to reach the appropriate government official and then speaking with that official to confirm our legal research.
I wrote this post in less than 20 minutes. If I had spent more time on it and if I had circulated it to some of the other China attorneys in my office (especially if I had sent it to Grace Yang, our lead China employment lawyer), I am certain we together easily could have written at least another ten paragraphs as to why we cannot give any real answer to the above comment without knowing more and without doing our research.
Last week, Grace wrote a post (DIY China Employment Law. Really?) on the problems she sees with foreign companies trying to handle their China employment law matters without a lawyer. Our giving knee-jerk answers to China legal questions would be the China lawyers equivalent.
So for future questions regarding your specific legal issues, please consider the below to be our answer:
We do not know enough to be able to answer your question. For us to be able to answer your question we would need to know a lot more facts and then we would need to conduct legal research into the written laws for wherever it is that you are located and then we would probably want to discuss your situation and our legal findings with the relevant government officials as well. Until we do these things, we simply cannot give you an answer that would be helpful to you.
Because of this blog, our China lawyers get a fairly steady stream of China law questions from readers, mostly via emails but occasionally via blog comments or phone calls as well. If we were to conduct research on all the questions we get asked and then comprehensively answer them, we would become overwhelmed. So what we usually do is provide a super fast general answer and, when it is easy to do so, a link or two to a blog post that provides some additional guidance. We figure we might as well post some of these on here as well. On Fridays, like today.
Probably the most common question we get is some variant of the following:
I ordered ____ number of widgets from _____ company in China and I paid them _____ dollars. They never sent me anything [or they sent me a fake or they sent me bad quality] and now they are not answering my emails? Can you help?
Pretty much 100 times out of 100, our answer (sometimes after we have gathered up more information) is something like the following:
I’m sorry, but we are not interested in taking on your case on a contingency fee basis and I cannot in good conscience ask you to pay us to handle it.
Our lack of interest in your case stems from the following:
1. Your contract [this probably wrongly assumes that the English language PO sent to us qualifies as a contract under Chinese law] is in English. Many courts in China will not hear a case with an English language contract. This is even more likely to be the case in a place like _____. For more on the importance of your contract being in Chinese, check out China OEM Agreements. Why Ours Are in Chinese.
2. You never paid the Chinese company to whom you issued the PO and from whom you received the bad product. You instead paid some other company based in Hong Kong. This is a classic China ploy. If you sue the Chinese company it will say that you never paid them because you didn’t. Not sure if it will win on this, but it is yet another hoop you will have to jump through.
3. Your PO says that you will inspect the product before it ships. The Chinese manufacturer will contend that you either did inspect and were fine with the shipment or that you chose not to inspect and thereby relinquished your right to complain about product quality. Either way, it should make for a pretty good defense. If you are not going to inspect product before it gets sent to you, you should not have this sort of provision.
4. You say that the product you received is of bad quality but your PO nowhere mentions the quality you would be requiring. When it comes to China, if you want your product to be of a particular quality, you need to set out in great detail every single specification that will get it to that quality. China has incredibly low quality levels that are just fine for Chinese commerce and for Chinese courts. From what you have provided me, there is nothing to indicate that your Chinese manufacturer failed to give you exactly what you ordered. You say that what you received is of bad quality and I am sure that is true, but that is under US standards. Under Chinese standards you asked for 5,000 widgets and that is exactly what you got and that is probably all that is going to matter to a Chinese court. For more on why this matters and for how you should handle this the next time you have product manufactured in China, check out How To Get Good Product From China.
You might want to try to interest a Chinese lawyer in pursuing your case in China. Suing the Chinese company in the United States will probably be a waste of your time and money unless this Chinese manufacturer has assets in the United States, and very few do. I very briefly researched the Chinese company to whom you issued the purchase order and it is not even a manufacturer; it appears to be a broker of some sort and Chinese brokers usually do not have much in the way of assets in China, much less in the United States. China courts do not enforce U.S. judgments so even if you win over here, it will be of no value in collecting money from your Chinese manufacturer in China.
If you are going to continue buying product from China, you should have a contract that will work. I suggest that you read the links within this email [now this post] to help prevent this same sort of thing from happening to you again. Again, I am sorry that we cannot be of more help on this.
Maybe 10 out of 100 times, we get a response asking us whether they should pursue their case via the U.S. Embassy or the U.S. Consulate or through their own embassy or consulate (for some reason we seem to get a disproportionate number of these from Australians) may be. To which we always respond as follows:
You can try to pursue this with your embassy or consulate but they generally do not seem interested in these sorts of commercial law matters and we have never heard of a single person getting their money back using this route. This is not to say it isn’t possible, but we are not aware of it ever working. If you do go this route and it does work, please let us know.
So now a question for you, our loyal readers. Have you ever heard of anyone getting their money back on a China product purchase by going through their embassy or consulate?
The post Quick Question Friday, China Law Answers, Part XXI appeared first on China Law Blog.
Our China lawyers often get appreciative emails from non-lawyers saying our blog has helped them do x, y or z on their own. We love the good vibes, but emails like these are sometimes a bit troubling. At the risk of being blunt, this blog should not be read as a DIY advice column like “This Old House” or “Dear Abby.” Certainly our goal is to illuminate the real-world legal issues faced by companies doing business in China, but a blog post should not be taken as individualized legal advice. If you learn anything from reading this blog, it should be that the legal terrain in China is complex and changing rapidly.
Take employment law (on which I spend much of my time). Chinese employment law is governed by an almost overwhelming number of laws, regulations, measures, policies, circulars, meeting minutes and other dictums. The rules may be national, regional, provincial, city-wide, or just district-wide within a particular city. Many are unwritten and can only be known by direct communication with the local labor bureau.
The increased availability of translated PRC laws has, in some ways, made the problem worse, because — even assuming the law is still valid and the translation is accurate — a single law, standing alone, paints an incomplete picture and often implies a course of action that is just plain wrong. Some of the worst-positioned employment cases we get are where the client has made key decisions based on their understanding of a single translated law. Far too often these decisions directly contravene local rules, which are rarely translated and often unknown to anyone not doing employment work. In China, the local rules can be highly differentiated. A policy that works fine in one city could get your company into hot water in another. For example: non-compete agreements that do not specify the amount of compensation are likely enforceable in Shanghai but not in Guangdong.
A friend of mine works as the in-house employment lawyer for a massive technology company in China, and he admitted to me that he frequently wakes up in the middle of the night to double-check his work; he has to deal with so many cities in China, and is constantly worried that he may have missed something. I empathize with him; there are so many rules and they change so often. And even if you find the applicable rules, you still need to analyze how they apply to the specific situation. I am on the phone nearly every day with local labor law agencies across China, asking questions about their interpretation of a given law/regulation/rule/etc. Anyone who knows China knows that if a rule clearly appears to say one thing but the local authorities believe it says something else, your reliance on the clear meaning will be for naught.
As with most things, the trick is knowing when you need a lawyer and when you don’t. For more on this, check out Inexpensive China Lawyers. Really?
Following in the footsteps of our recent post Forming a China WFOE: Ten Things To Consider, I present to you: China Employment Contracts: Ten Things to Consider. Here goes, the top ten things you should consider when employing anyone in China.
- Term of employment. China’s employment system is a contract employment system. This means each employee must be hired pursuant to a written contract and this also means that it is very difficult to fire an employee during the term of that contract. After the initial contract term expires, you may re-hire the employee pursuant to a second fixed term contract. In most places in China the employee will automatically be converted into an employee with an open contract term at the end of the fixed term. This means you have only one chance to hire an employee on a fixed term basis and so you should be sure to use an appropriate initial employment term. We usually (but not always!) recommend an initial term of three years because that allows you to provide a six month probation period (the longest period permitted under Chinese law), during which time you can relatively easily terminate an employee and because it delays the onset of the open term period for a period long enough to allow you to determine whether it makes sense to convert the employee to an open-term employee.
- Salary. Your written employment contract must set forth a salary. One issue to consider here is whether to pay a 13th month in salary, which is customary in many parts of China, and is typically paid out before the Chinese New Year. This is not required, but if you decide to do it, you will want to specify clearly and in writing the conditions for receiving this 13th month salary or you may have to pay this bonus forever even though you wanted to preserve your option to do otherwise.
- Bonus. If you are going to have a bonus system for your employees, you should set out its parameters in the employment contracts.
- Vacation. The statutory vacation period is based on years of service, as follows:
- More than 1 and less than 10 years service: 5 days vacation
- More than 10 and less than 20 years service: 10 days vacation
- More than 20 years service: 15 days vacation
If you want to provide more vacation time than set forth above, you should so specify in the contract.
- Other benefits. Your company’s rules and regulations typically provide for the statutory minimum and apply to all employees. If you want to provide additional benefits to a particular employee, you should put that in the employment contract with that employee. If you wish to provide other benefits beyond the statutory minimum to all of your employees, it usually makes sense for you to spell that out in your rules and regulations.
- Travel. If your employees will travel domestically or internationally, you should have a written travel expense policy.
- Overtime. You will generally be required to pay overtime to any employee who works beyond the normal working time of eight hours a day and five days a week. If this standard system does not work for you, you should consider adopting an alternative working hours system for a given employee. See China’s Forty Hour Work Week Is Mandatory. Except When It’s Not, China’s Forty Hour Work Week Is Mandatory. Except When It’s Not. Part II and China’s Forty Hour Work Week Is Mandatory. Except When It’s Not. Part III.
- Trade Secrets/IP Protection. If IP is important to you (and most of the time it most certainly should be), you should have a separate Trade Secrecy and IP protection agreement with your employees.
- Rules and Regulations. You must have one. You will also want to make sure that your employees acknowledge in writing that they have received this document and that they agree to abide by it.
- It’s complicated and it’s local. I don’t mean to scare you here (actually I do!), but Chinese employment laws and regulations are always changing and they are always local and your employment contracts should always be in Chinese. If this doesn’t scare you….
The post China Employment Contracts: Ten Things To Consider appeared first on China Law Blog.
I meet a lot of foreigners skipping through China on business. Many of them are delegates on trade missions or attendees at festivals or summits. They frequently allow their Chinese friends to pressure them to sign little documents while they’re in town. The foreigners think there can’t be much harm in signing short, “informal” documents with harmless sounding names like “LOI”, “MOU” or “HOA”. The artificial deadline tactic always seems to work for the Chinese whenever they try it on. Often there’s a kind of ceremony with officials in attendance and some nice banners in the background. Lots of photo opps. There may even be a banquet or two with the obligatory over-consumption of baijiu. More photo opps. It’s lots of fun and the foreigner goes home with a sense of achievement. They signed a deal in China!
Then we get two types of calls.
In the first type of call, the foreigner is shocked to find that their Chinese friends are resisting a long-form document by which the foreigner wishes to replace that harmless little LOI. The long-form is invariably written entirely in English and is full of common law irrelevancies and foreign standards that make it entirely unsuitable for China, not to mention disrespectful. Even if it ever gets signed it will take ages — ages during which there is good reason for the Chinese to stall in making any expected payments. Or the Chinese may even threaten to take action based on the foreigner’s negligence in the contracting process. But that’s all beside the point. The point is that the Chinese got what they wanted in their first pass so there’s no need for them to sign another document. The foreigner gave too much away in the beginning. My favorite examples in the film industry are the foreign producers who give away Greater China distribution rights without any mention of distribution costs and an appropriate waterfall. There are many more such examples across all industries.
Then there’s the second type of call.
The foreigner is disappointed that six months have gone by and nothing has happened since that harmless little LOI was signed. Emails are going unanswered. Phone calls unreturned. Suddenly, nobody speaks English any more. What the foreigner didn’t grasp was that the ceremony, with its banners and officials and photographs, was all the Chinese ever wanted from the relationship. There was no deal. The Chinese hit all their KPIs for that quarter by holding a little ceremony. The higher ups are happy and everyone in China has long ago moved on.
So, you need to decide from the outset whether you want an enforceable agreement or an unenforceable document. Do you want a real deal or do you just want to be able to tell people about some ceremony you attended.
If you want an enforceable agreement there is no reason why you can’t enter a proper agreement covering everything right from the start. Agreements in China tend to be shorter and less complicated in any case. That’s not to say that they can’t cover everything.
If all you want is an unenforceable document then you’ve got to wonder why you should sign anything at all. There’s an art to signing meaningless and unenforceable documents just as there is an art to signing something enforceable. But is it really worth it?
By popular demand (one email to one of our China lawyers) we are reprising our “Ten Things To Consider” series, starting anew with forming a China WFOE. Here goes.
- Make Sure Your Business Scope is Legal. Too many WFOEs never get past the starting line. A number of industries are restricted to foreign-invested companies, so before you sign a lease in Shanghai or Shenzhen or Shenyang, make sure you can actually do what you propose to do in China. There’s a reason Hollywood studios and production companies enter into joint ventures in China instead of forming WFOEs, and it’s not just because they need local know-how. See How to Form a WFOE in China: It’s the Business Scope, Stupid.
- Make Sure Your Business Scope is Accurate. A corollary to the above point is that some foreign companies will form a WFOE with a business scope narrower than what it actually intends to do. Not a good idea. In America, you can always form a company (no, sadly, this is not the beginning of a Yakov Smirnoff joke). You do not need a laundry list of approvals, and you can usually complete the entire thing online in about 10 minutes. But after you form a U.S. company you must then come into compliance with a variety of applicable laws. In China, it is very difficult to form a company, not least because you must come into compliance with a variety of applicable laws before gaining approval for the company formation. And all of these approvals are based on the business scope of your WFOE. If you want to go into a different line of business, you need to change the scope of your WFOE, and for that you need approval. And that approval could take as long as it took to form your WFOE in the first place. So it is imperative that you get this right the first time around, and not just form the easiest company possible just so the people forming your company for you on a flat fee basis can do as little work as possible.
- Pick Several Possible Chinese-Language Names. Many clients delegate the job of naming their WFOE to a Chinese employee. This is not necessarily a bad idea, but chances are good that the employee will draw from a relatively small subset of positive-connotation Chinese characters used for transliterations and translations. And when you consider that a huge number of companies have already been formed in China, the odds are high that your first choice for your company name will be rejected. And your second, third, and fourth choices too. To avoid wasting time, have a bunch of possible names at the ready when you file your application and consider using a legitimate and series branding company to assist.
- Settle on the Location For Your WFOE Before You Start the Process. Again, this is completely different from America, where you can use your parents’ house or your lawyer’s office as the address for your company until you figure out where you actually want to lease space. In China, you must determine the city and the district where your WFOE will be located before even starting the process, because the rules governing the formation process differ by city and often even by district. Moreover, most locations require that you submit a signed lease as part of the final application – and sometimes that lease must be signed by the WFOE. Yes, it’s just as weird as it sounds. Certain authorities require – require! – that a lease be executed by an entity that doesn’t exist yet, and may never exist. You also need to confirm that the lease space is suitable for use by a WFOE with the proposed business scope. And we haven’t even touched on the substantive provisions of the lease. In short: location matters. It matters a lot.
- Do You Want To Be in a Free Trade Zone? Well, Do You? The bloom is off the rose (or maybe it was more of a bachelor’s button) with respect to the much-ballyhooed free trade zones, but for certain businesses conducting certain kinds of business – especially customs-intensive businesses – a FTZ might make sense. But before you can make a rational decision about this, you need to decide what your WFOE will do.
- Will Your General Manager Be Local or Foreign? A WFOE’s general manager is in charge of the WFOE’s day-to-day operations, and is the initial point of contact in China for everything from employees to the landlord to taxes. Often, the general manager is also in possession of the company chops, giving him or her even more de facto power. Accordingly, many foreign companies prefer to have someone from the home office serve as the general manager. At the same time, companies (especially smaller ones) can find it difficult to identify someone in the home office who is both willing to relocate and has enough China know-how to handle the day-to-day operations. One common compromise is to hire a Chinese national as the general manager, and have the WFOE’s China accountant retain possession of the seals. You have a lot of options here but it is important that you choose wisely.
- Hire a Good Local Accountant. Many foreign companies feel like they need to hire one of the Big Four companies to handle the day-to-day accounting for their 4-person China WFOE. Certainly the big boys can handle this work, but it might also be overkill. China has many reputable accounting firms, and many are better suited to handling the day-to-day operations of a smaller entity. To say nothing of being a lot less expensive. But don’t pick someone just because they’re cheap. We maintain a top secret list of really good accounting firms that can help our clients with both their China and their international taxes and charge 25% to 35% less than the Big Four, though sometimes the Big Four make sense.
- Single Director or a Board of Directors? This is not the biggest decision you will make, but it could have meaningful logistical repercussions. Let’s put it this way: when forming a WFOE, or making changes to a WFOE, a lot of documents need to be signed, and usually in a very specific way. The fewer people that need to sign those documents, the better.
- Will You Have Foreign Employees? My colleague Grace Yang writes eloquently and often about Chinese employment law. One issue that comes up with surprising regularity is the disconnect with foreign employees who expect to be treated exactly the same as in their foreign jurisdiction. With very few exceptions, foreign employees of a WFOE are governed by Chinese labor law. This should not be surprising. Would you expect workers at a Chinese-owned factory in America to operate under Chinese labor law? But the disconnect can play out in surprising ways. For instance, one WFOE had an extremely difficult time bringing a specific employee over to China, because this employee was over 60 and therefore past the mandatory retirement age for the particular industry.
- Make Financial Projections Before Starting the WFOE Formation Process. You know that thing you have to do when you ask potential investors for money? That thing called making a business plan? Think of the Chinese authorities like potential investors. They aren’t going to hold you to quite the same standards – for one, no pie charts – but they will want to see that you’ve spent more than five minutes thinking about what you’re going to do in China and that you will have sufficient funds to last long enough to pay your employees and your vendors. That means producing reasonable projections of your income and expenses over the first few years, and providing a narrative explanation of (1) your WFOE’s business, (2) how it fits into the existing market, and (3) why it is not going to be an abject failure. You want your WFOE to be approved, right?
Oh, and one more thing. The above ten (and more) matter a lot because if you don’t get your WFOE approved the first time around, the odds of you ever getting approval go way way down.
On April 27, I and my friend Randall Lewis, Vice President and International Counsel for ConAgra Foods, will be sharing a virtual podium for a free webinar. This webinar is being put on by LexisNexis and in it we will together be discussing the following:
- How to choose a good Chinese partner
- How to identify the IP assets you need to protect
- How to structure your deal to protect your IP
- How to conducting China due diligence
- How to drafting China contracts to protect your IP
- How to choose how your dispute resolution forum
LexisNexis describes it as follows:
Too many American companies go into China or start doing business with Chinese companies, without really knowing the varied risks China poses to their valuable intellectual property and trade secrets,” said Dan Harris, author of the China Law Blog. “These risks should be of utmost concern to anyone whose interests intersect with China. We will show you how to prepare your deals, avoid costly thefts and litigation and defend your IP.
Join Dan Harris of Harris Moure and Randall Lewis, Vice President, International Counsel at ConAgra Foods, as they share strategies and real-life tales that will help government agencies craft regulations and oversight provisions and in-house and outside counsel protect IP and deal with the litigation that results when things go south.
The post Is Your IP China-Ready: A Free Webinar on April 27 appeared first on China Law Blog.
Because this blog is more than ten years old, there is hardly a China business or law situation of which we have not written at least once. Last week, one of our China lawyers got an email from a company wanting to hire us because they needed help finding someone to bribe someone in China because “it would be too risky for us to do it ourselves.”
It reminded me of a previous email (which had not been to me, but which I thought I remembered from a blog post, and I was right. That post was from April, 2014, and it was entitled, Dude, Didn’t Your Mamma Tell You Not To Engage in China Bribery Through Intermediaries? Rather than craft a new blog post, I will simply borrow from the old one, because nothing has changed. Or one might say that a lot has changed because China itself has massively stepped up its own anti-corruption enforcement.
That post involved a similar email:
After repeated attempts by our ________ [in China] to retrieve the goods/money by bribes and threats without success, we must now look at other options.
A younger me was incensed:
Are you kidding me? Are you friggin kidding me?
I immediately wrote back to say that my firm had no interest in working on the case because it did not make economic sense to hire us to pursue the amount at issue and also to sternly warn him (it was a male) that using an agent to pay a bribe is blatantly illegal. I also strongly suggested that he contact an attorney in his home country to figure out his best course of action for dealing with what he had already done in terms by using an intermediary to pay a bribe.
I then explained the issues in paying bribes, even through intermediaries:
Using intermediaries to pay bribes is illegal under every country’s anti-corruption act of which I am aware and it is certainly illegal in the 40 countries that have ratified the OECD Anti-Bribery Convention and under China’s anti-corruption laws. To oversimplify, you are bound by the anti-bribery laws of all of the countries in which you conduct business.
In bribery law terms, an “intermediary” can be roughly defined as any third party who assists in some aspect of your foreign business. This can (and usually does) include your sales agent, your joint venture partner, your distributer or reseller and even sometimes your OEM manufacturer.
Using intermediaries overseas does not protect you from the risk of going to jail for corruption, it INCREASES that risk. Most corruption cases involve conduct by third parties.
You should be conducting reasonable due diligence on those with whom you conduct your business to determine that they are not involved in corruption. You also should be making clear to the third parties with whom you deal (both in writing and otherwise) that you will brook no corruption on their part — especially on your behalf. And you should record all of this so that if you are ever investigated, you have something to show the government (whatever government that may be) all that you did.
The post Doing Business in China: Don’t Bribe Anyone, Even Indirectly appeared first on China Law Blog.
China, Indiegogo, Kickstarter, The Internet of Things, Marshall Goldsmith, and Suing Your Lawyers and Sourcing Agents Because It Is Getting Really Really Bad Out There
One of our internet of things hardware clients recently told me how none of what he has learned about the need to protect his intellectual property from China had ever been even hinted at in any of the many IoT seminars he had attended nor in the Indiegogo Hardware Handbook he had “religiously consulted” before he did his first IoT product.
I am about halfway through Marshall Goldsmith’s truly stellar book, What Got You Here Won’t Get You There, so I was quickly able to provide a compelling exclamation for why this was the case:
Everything in an organization is designed to demonstrate commitment to positive action — and couched in terms of doing something.
Likewise, the recognition and reward systems in most organizations are totally geared to acknowledge the doing of something. We get credit for doing something good. We rarely get credit for ceasing to do something bad.
CEOs don’t proudly announce that they decided not to acquire another company or go into another country or event that they just went another month without having their IP ripped off by China. Those at seminars and at Indiegogo (and I have no reason to believe Kickstarter is any different) are essentially boosters encouraging their troops. Talking about the need to protect IP is just too negative.
A lawyer’s role is different. Our job is to figure out and minimize risks. And these days, the biggest risk our China lawyers see, day in and day out, is Western companies losing their IP to China — especially tech companies and even more especially Internet of Things companies.
Less than a month ago, in China and the Internet of Things and How to Destroy your Own Company, I wrote on how our China lawyers are getting inundated with hardware and technology companies coming to us after they have lost or badly compromised their intellectual property and their hardware product and their company. To use farm-speak, they are asking us to close the barn door after at least some of the pigs have already left the farm.
Last week, in Worthless China Contracts: First, Let’s Sue All The American Lawyers, I wrote about how the lawyers for these companies deserve a large chunk of the blame. I am now adding the crowdfunding companies and the hardware consultants and as complicit in ignoring the intellectual property risks inherent in giving your IP to Chinese companies with nothing more than an essentially worthless US-Style NDA.
In China and the Internet of Things and How to Destroy your Own Company, I wrote about the China attorneys at my firm having been contacted by companies with the following issues:
- A European company with a highly profitable product is being threatened with a patent infringement claim by its Chinese manufacturer angry about the European company’s plans to diversify its manufacturing risk by finding an additional manufacturer.
- An American company with high profitable technology came to us with an illegal joint venture arrangement such that we have our doubts that there is anything that can be done to fix it or, more importantly, fix the various problems the joint venture is inflicting on this American company.
- A few more instances of American companies having signed what they believed to be non-binding MOUs with their Chinese manufacturers that are actually binding contracts that give their manufacturers all or some rights in the American companies IP.
We recently took on two new matters where sourcing agents shopped our clients product around China and then signed up less than reputable Chinese manufacturers, all without any IP protection in place. And guess what, our clients are now scrambling to try to save what they have. In my post calling out American lawyers for failing to protect their clients I suggested that companies that have lost their IP to China consider suing their lawyers for the damages caused. I am not suggesting anyone sue Indiegogo for its handbook or any of the seminars or its participants for their failure to discuss IP. But it has definitely reached the stage where we are suggesting to our clients that they consider suing their sourcing agents. Nearly a decade ago (yes, you read that right), in China Consultant, Protect Thyself, I wrote about the “huge liabilities” China consultants were inadvertently taking upon themselves by doing the following:
If you take a sample to China and start showing it to potential manufacturers without FIRST putting in place various safeguards, you are courting disaster. The sample could be used for counterfeiting. We had a consultant call one of our China lawyers in a panic after returning from China to learn that one of the manufacturers to which he had shown a sample had already started manufacturing the product for someone else using the consultant client’s trademark which it had gleaned from the Internet. The Solution: Never show a sample or product plan or reveal your trade name(s) without first making the Chinese manufacturer sign a China-centric NNN Agreement (essentially a hopped up NDA that protects against competition, circumvention and disclosure). Chinese manufacturers tend to be quite familiar with NNN agreements and if you give them a simple and reasonable one, in Chinese, they will sign it.
- You the consultant must do more than simply negotiate the price and delivery dates or you should at least make clear in writing that these are your only tasks. Typically, product sourcing consultants oversee the OEM contract with the manufacturer and by doing so, they face major liability issues if that contract is not up to snuff. You are the “China guy” and your client is counting on you to guide it through China’s business minefields. You are the one who is supposed to know anything and everything about what it takes to do business in China. Equally importantly, with the manufacturing of its product, your client is probably turning over to the manufacturer all sorts of critical intellectual property. Your client probably thinks that its existing patents, trademarks and copyrights will protect it in China, but a court will expect you as the China expert to know better. The Solution: Put in writing with your client that you will not be providing it with legal advice and that it will need to retain its own lawyer to draft the OEM agreement with the Chinese manufacturer. Put in writing that it is your client’s responsibility to protect its intellectual property in China and that to do so, it must register its IP in China, either through a lawyer with whom you connect them or independently).
Just remember that your client sees you as the expert at doing business in China and it is looking to you for help in all areas and if you fall short in any way, you are at risk for a lawsuit.
As China and its companies seek to move up the product and innovation value chain, things are only going to keep getting worse. It is as bad as we have ever seen it out there and there is plenty of blame to go around.
The post China, Indiegogo, Kickstarter, The Internet of Things, Marshall Goldsmith, and Suing Your Lawyers and Sourcing Agents Because It Is Getting Really Really Bad Out There appeared first on China Law Blog.
Just got off the phone with a U.S. company that just learned that the Chinese company (they cannot even remember who it was) it paid to register its trademark in China 3-4 years ago never did so — though it received what it now realizes is a fake China trademark registration certificate. I can’t tell you more about this case because it is so new, but it very much reminds me of the following case study in The Sovereign Group’s 2015 China Market Entry Handbook (which I have in my office because one of our China lawyers wrote the IP section for it) entitled, The Case of the Shanzhai IP Agent:
A North American food company that had become quite successful selling its food product in China learned that a company in Beijing was selling counterfeits of its product. Believing it had registered its trademark in China, the North American company began preparing to sue the Beijing company. In the process of doing so, the North American company learned that while it had retained and paid a purported trademark agent to file a trademark, they had never received a trademark certificate, and the “trademark agent” had in fact taken their money and done nothing.
Without a registered trademark in China, the North American company was powerless to stop the counterfeiter. Its only option was to register its brand name as a trademark, wait more than a year until the trademark proceeded to registration, and then send out a cease and desist letter.
The best way to protect your brand name in China has not changed: register the brand name as a China trademark now, so that when you need to defend it, you already have the registered trademark in hand. And don’t be afraid to ask for references. Reputable service providers will not hesitate to give them.
It was true then and it apparently is true now. Register your trademarks in China, but do so through someone you can trust, or maybe don’t bother at all?
Our China lawyers are getting a new wave of American (and one European) companies contacting us about having fallen victim to what we call the China bank switch scam. The amounts lost have ranged from $22,000 to $285,000.
Our general response to these is as follows:
I am sorry this has happened to you, especially since your chances of getting back all of your money are very low.
If you were to retain us, we would charge you by the hour to do the following:
1. Work with your insurance broker and your insurance company to see if it will cover you for this loss. This is usually your best chance of recovering all that you have lost. We can help by explaining how these scams happen and why you are entitled to coverage under your policy, assuming that is indeed the case.
2. Try to get some monetary contribution from your Chinese supplier by letting it know that it was their computer system that the scammer hacked and therefore it should pay at least some of your loss. This works maybe half the time in getting maybe half of the money back, usually over time. Much will depend on your existing relationship with your Chinese supplier and on what it perceives its future relationship with you will be. If you have already corresponded with your supplier regarding this situation, we will want to examine that correspondence.
3. Try to determine if there is any chance in recovering anything from the perpetrator. This is a very expensive and time-consuming process and it makes sense only when you have lost a lot of money.
The bank switch scam is the most common, most pernicious and most difficult to detect China scam of which I am aware, and it just unrelentingly keeps happening. And even though the business relationship is between a Chinese company and a Western company, the perpetrator of the scam oftentimes is in Nigeria or in some country other than China.
This scam usually involves your regular Chinese supplier asking you to make a payment or payments to a new bank account, though it sometimes can involve your very first payment to a new Chinese supplier. Then even after you make the payment or payments, your China supplier insists you still owe it the full amount (oftentimes with added fees) because it never received your payment. When you explain to your China supplier that you in fact did pay it, your supplier points out that the bank account to which you sent the funds is not theirs and that you still owe the money.
This all happened because your Chinese supplier got hacked, either by someone outside or within the company and you indeed have yet to pay it. Or maybe it was you who got hacked.
I wish that I had some new method of preventing this scam (just as I wish that everyone who does business internationally would read this post so that this scam never happens again). But I must resort to saying what we have been saying all along.
We are constantly writing about this scam on here in an effort (failing, I’m afraid) to prevent it from happening again. This is a scam that can happen to YOU. We have seen many smart, worldly, sophisticated companies of all sizes get caught up in this scam.
I am writing this post today not just because our China attorneys are again getting a bunch of China bank scam emails and phone calls, but also because a loyal reader sent me a great article, entitled, Mattel fought elusive cyber-thieves to get $3M out of China, regarding how this happened to Mattel and how, by acting quickly Mattel was able to get its money back.
The article starts by setting the scene of how it was that Mattel sent $3 million dollars to a scammer’s bank account:
The email seemed unremarkable: a routine request by Mattel Inc.’s chief executive for a new vendor payment to China.
It was well-timed, arriving on Thursday, April 30, during a tumultuous period for the Los-Angeles based maker of Barbie dolls. Barbie was bombing, particularly overseas, and the CEO, Christopher Sinclair, had officially taken over only that month. Mattel had fired his predecessor.
The finance executive who got the note was naturally eager to please her new boss. She double-checked protocol. Fund transfers required approval from two high-ranking managers. She qualified and so did the CEO, according to a person familiar with the investigation who spoke on condition of anonymity because he was not authorized to speak about the matter. He declined to reveal the finance executive’s name.
Satisfied, the executive wired over $3 million to the Bank of Wenzhou, in China.
Hours later, she mentioned the payment to Sinclair.
But he hadn’t made any such request.
Realizing it had been duped, Mattel acted quickly by calling their U.S. bank, the police and the FBI, all of whom told Mattel it was “out of luck” because the money is already in China.
Note that this version of the scam is a bit different than that I outlined above. This is a variant known as the “fake CEO” or “fake president” scam, and it is — not surprisingly — more commonly experienced by massive companies than by SMEs:
Mattel’s millions were swept up in a tide of dirty money that passes through China and that Western police are only beginning to understand. The scam the company fell victim to — known as the fake CEO or fake president scam — has cost companies, many of them American, over $1.8 billion, according to the FBI. Most of the stolen money passes through banks in China or Hong Kong, the FBI said.
China has become a popular destination for such scammed funds because cooperation between U.S. and China law enforcement is so weak. The criminals attacking Mattel in this instance had the $3 million sent to Wenzhou, “a gritty enclave on China’s eastern coast that is emerging as a significant transit point in global money laundering networks. The city is the destination for 90 percent of the funds stolen through fake CEO scams in Europe, according to an intelligence memo reviewed by the AP. Wenzhou city officials declined to comment.”
Mattel quickly notified Chinese police, “who quickly launched a criminal investigation, according to a letter from Mattel thanking Chinese authorities, which was obtained by the AP”:
When the Bank of Wenzhou opened the following Monday, a China-based anti-fraud executive from Mattel strode past the sculpted lions that flank the entrance to the bank’s headquarters, marched upstairs to the International Business Department and presented a letter from the FBI, according to two people familiar with the investigation who were not authorized to speak publicly.
Chinese police froze the account that very morning. Two days later, on May 6, Mattel got its money back, according to the letter.
Mattel wrote that the Wenzhou police “showed a great sense of responsibility and enforcement capability.”
“We hereby reiterate our appreciation,” Mattel wrote. “We also hope that this case can pave the way for future international cooperation in fighting similar transnational crimes.”
* * * *
It’s still not clear who was behind the scam.
What can you do to prevent it from happening to you? Do the following:
1. Get to know your suppliers who speak English (if you don’t speak Chinese) and get your supplier’s landline phone numbers as that cannot be hacked. Call if you have any concerns.
2. Get your supplier’s bank account information in advance and ask them to refer to “bank account information document” on their invoices, rather than listing out full bank details every time.
3. Ask your suppliers to fax you their invoice and make sure the sending fax number belongs to your supplier’s company.
4. Do a first small wire to confirm the account.
5. Have a special procedure for confirming the company name. Note also “that paying a Chinese company in mainland China is safer for you” than paying them overseas, be it Hong Kong, Taiwan or anywhere else.
6. Have a special procedure for confirming bank account changes. “Follow the same procedure as point 5, but also call several people in the company. They will understand your attitude if you tell them you are worried about the “different bank account scam” — they are also a victim when it happens to their customers.
7. Have an internal procedure for confirming all payments over a certain amount.
Late last month, China’s Ministry of Human Resources and Social Security (“MOHRSS”) implemented Opinions on Several Issues Concerning the Implementation of the Regulation on Work Related Injury Insurance (II)(人力资源社会保障部关于执行《工伤保险条例》若干问题的意见（二）)(the “Opinions”). The Opinions offer some (but as is fairly typical, not enough ) clarification on various current regulations. This post highlights a few key aspects of the Opinions.
The Opinions make clear that an employer who continues to employ someone who has reached his or her statutory retirement age (this age depends on the specific industry and position — the usual retirement age is 60 for male workers and 50 for female workers; however note that China is currently discussing increasing its ages for retirement) is responsible for providing work injury insurance for any such employee. In other words, even an employee who has reached the statutory retirement age suffers a work-related injury or occupational disease during employment and the employer has been contributing to work injury insurance on a project basis, the Regulation on Work Related Injury Insurance will apply. Though this only makes sense, this was formerly unclear.
The Opinions also state that the reasonable route an employee takes between his or her employer’s location and the employee’s residence for purposes of going to or from work will be considered “on the way to/from work” for purposes of the law and will not be covered by work injury insurance. This includes routes employees take when the employee works overtime.
An employee who suffers an injury while participating in an activity held by another entity and such activity is related to the employee’s work duties, it will be deemed to be work related injury.
If the employee is based out of town for work reasons and has a permanent address and a definitive work and rest schedule, for purposes of determining the employee’s work injury, the rules in the location where the employee is actually based shall be used.
An employer that does not operate from its place of registration usually should contribute to the employee’s work injury insurance in the place where the employer is registered. For dispatched employees assigned to work in a location other than the place where the dispatch agency is registered, the dispatched employee’s social insurance must be paid in the place where the company that uses the employee is located.
Employers in the construction business that contribute to their workers’ social insurance on a project basis must get work injury insurance in the location of the construction project.
Bottom line: Regardless of where your employees are based, if you are a China employer, you must (and you should) contribute to social insurance for your employees. And depending on your location, you may also need to contribute to social insurance for your expat employees as well.
AmCham China’s Media & Entertainment Forum is putting on a what is sure to be a great event in Beijing on Thursday April 21st, from 5:30 p.m. to 7:00 p.m.: “China film finance — in conversation with Bennett Pozil of East West Bank.”
AmCham describes the event as follows:
China’s film business is growing at an astounding rate. The Chinese box office will eclipse North America’s in only a few years. Every week brings announcements of exciting new Sino-US film projects, investments and acquisitions.
However, Hollywood’s financing models are stretching to fit this new environment. Concerns about box office reporting abound. Completion bonds and insurances are just emerging. Collection account management also faces new challenges. As filmmakers and studio executives from around the globe converge for the Beijing International Film Festival, hear from a leading expert on Chinese film finance. Issues to be covered will include the following:
- Financial structuring of Sino-US motion pictures
- The roles of banks and lenders in the financing process
- Tips for foreign producers or studios raising money from Chinese investors
- Tips for successful co-productions
- Collection account management in China
- Completion guarantors and production insurers in China
Mathew Alderson, who heads up our China media and entertainment practice out of our Beijing office and is a co-chair of the AmCham Media and Entertainment Forum, will be the moderator.
Please go here to register.
Bennett Pozil is highly experienced in dealing with China film financing issues and if you’re going to be in town for the Beijing International Film Festival, you should get along to AmCham for this great event!
As I wrote in China Employment Contracts: If Yours Are Not Current, You Have A Problem, China employers must have written labor contracts with each of their full-time employees. Not having a written labor contract exposes employers to penalties (to their employees) administrative fines and the risk of being deemed to have entered an open-term labor contract with the employees lacking the contract. Most companies now understand this, but many do not realize that just a contract is not enough; every employer should have a set of rules and regulations as well.
The rules and regulations (规章制度) (sometimes referred to as an employee manual) is a long and complex document that sets out the full set of terms governing the employment relationship. One of the primary reasons employers need this document is because it provides the the grounds for terminating an employee.
Again, it’s important to note how China’s employment law system is very different from the system in the Unite States. In the U.S., employers can terminate employees pretty much at any time and pretty much any reason. This is called employment at will. China is not an at-will employment jurisdiction. All China employees must be engaged pursuant to a written labor contract and during the term of that contract, it is very difficult to terminate them. If an employer wants to terminate an employee before his or her employment term has ended, it can do so only for cause and cause must be clearly proven. For this reason, if you are a China employer, you should maintain careful discipline records so as to be able to establish grounds for dismissal.
The rules and regulations document should be detailed. Without this document, even if your employee does something terrible and harms your business, you will likely find yourself without a basis to discipline the employee (let alone terminate him ore her) unless your rules and regulations make clear that the employee’s actions were prohibited. One of our China lawyers loves to tell about a China case involving an employee who sued after being fired for stealing hundreds of thousands of dollars from his employer. The judge noted that the employee was a terrible person, but ruled that his employer could not fire him because there was nothing in the rules and regulations against stealing. I kid you not.
In some cities though, such as Shanghai, employers do not have to list every single punishable act in the rules and regulations to be able to discipline an employee. Shanghai is of the view that the principle of good faith governs during the employment relationship, so even though a certain act is not specified in the company rules and regulations as a punishable act, the employer may discipline or maybe even fire the employee who fails to act in good faith. But since many municipalities are not of a similar view and because even in Shanghai you are minimize your risks by being explicit, we generally put just about everything in the rules and regulations we draft for our clients.
But be careful what you put in your rules and regulations. Just because it is incorporated into the document does not make what is illegal permissible. If a provision is against the law and you relied on it in terminating your employee, your decision will be deemed to be unlawful termination. It is also a really good idea for you to review your rules and regulations document to ensure it remains in compliance with all applicable laws.
Oh, and one more key to a rules and regulations document. Put it in Chinese or you are at real risk of it being deemed unenforceable. We also like to see all employees sign something to prove they received it.
Bottom line: If you have China employees, you need a set of rules and regulations.
The post China Employer Rules and Regulations and Why You Must Have One appeared first on China Law Blog.
In the last year or so, China has rapidly stepped up its technology game. It’s larger, better known companies (and many of its smaller and lesser known companies as well) are rapidly seeking to up their technology game. To put it bluntly, their first goal is to get high end technology from American and European and Australian (mostly) companies for free. Failing that, it’s to get that technology as cheaply as possible. We have written about this indirectly many times, most recently in China Technology Licensing Versus China Joint Ventures: Same Same, and in How To Give Away Your IP In China.
Okay, so what does all this have to do with the title of this post? Let me explain.
In the last few months alone, our China lawyers have been confronted with what feels like an endless stream of instances where American lawyers have essentially committed malpractice to the extreme detriment of their clients. I wrote about this (with much less of an emphasis on the lawyers who allowed it to happen, just a few weeks ago, in China and The Internet of Things and How to Destroy Your Own Company:
In describing IoT companies and their problems to others, I use the following as my prime example, taken from at least a half dozen real life examples in just the last few months:
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 yet with this Chinese company regarding your IP or even costs or anything else.
IoT Company: No. All we have is an MOU (Memorandum of Understanding). They’ve really been great. They have told us that they would enter into a contract with us whenever we are ready.
China Lawyer: Can you please send us the MOU?
IoT Company: Sure.
China Lawyer: Okay, we will look at that and then get back to you with our thoughts.
Then, a day or two later we a conversation like the following ensues:
China Lawyer: We looked at your “MOU” and we have bad news for you. We think there is a very 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 that a Chinese court will be considering — is quite different than 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 what we see is that as things now stand, there is a very good chance that the Chinese company owns your IP. This being the case, there is no point in our writing a Product Development Agreement that your Chinese manufacturer is not going to sign.
IoT Company: (And I swear we get this sort of response at least 90 percent of the time) I’m not worried. I think you have it wrong. I’m sure that they will sign such an agreement because we orally agreed on this before we even started the project.
China Lawyer: That’s fine, but I still think it makes sense for you to at least make sure that they will sign a new contract making clear that all of the IP associated with your product belongs to you, because if they won’t, 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 been able to come back to us with an agreement from their Chinese manufacturer to sign.
In that same post, I wrote of the following variation on the same theme:
We have lately been getting a slight variation on this theme, where the IoT company is farther along in its product development and is actually now at the point of selling its product. This newer situation is exemplified by the email below, which is an amalgamation of various emails received, all fairly recently, and with any and all kinds of modifiers to make it impossible for anyone to be able to guess the companies:
Here is my situation. I am hoping your firm can help us figure out the best course of action going forward. [Then usually follows a description of their company and their IoT product and 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. BTW, this description far too often involves their domestic attorney having told them that 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 the relationship with our current manufacturer a year ago. He told us that POs are contracts in China and our lawyer here confirmed that. We sent him our design, paid for the molds, and he shipped us the products. Recently, we found out that he used our product pictures as marketing material on Alibaba. We suspect he is selling our products all over the world. A week or so later, I found out that he has filed for a design patent for our design in China.
We just started the working relationship with [online retailer]. Our manufacturer doesn’t know that. All I told him is that we are working with a big client, and if he doesn’t sign any agreements with us at this point, we’re not going to place new orders. He then told me he’s willing to sign a non-disclosure agreement with us. But based on what he has done, I don’t think it is in his best interest to work with us in the long run.
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 has been something like the following:
A PO is not really a contract it is the placing of one order. Unless your PO speaks to IP (which would be very unusual), it almost certainly will not help us here. 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 that is not in Chinese. The ideal is a Chinese language contract sealed by the Chinese company.
Our biggest concern is that this manufacture has gone off and 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 damages and to force production to cease. At minimum, he will be able to cause you all sorts of problems unless you can stop or invalidate his design patent. At this point, there is a good chance that this Chinese manufacturer literally owns your product in China and he can use that ownership to control what you do there.
If you seek to go to a new manufacturer you can be sure of two things: one, your old manufacturer will NOT give you the molds you think you paid for and two, it will use its design patent to, at minimum, 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 an extremely high risk proposition.
Based on the information you have provided us, it appears that you have four options, none of which are terribly good:
- You leave China entirely and you start manufacturing in some other country. Is this possible?
- You seek to block or invalidate your existing manufacturer’s design patent. This will not be accomplished quickly or inexpensively.
- You try to strike some sort of deal with your manufacturer whereby it assigns the patents to you and in return you agree to keep using it for manufacturing for x number of years. It may agree to this if what you can pay it will exceed what it can make by selling your product on its own. The fact that it has offered to sign a non disclosure agreement does not mean much at all, since such an agreement will not help you and your manufacturer almost certainly knows this. For why this is the case, check out Why Your NDA Does Not Work for China. You need him to sign a contract that actually makes clear what IP belongs to you and makes clear his limitations in using your IP. At this point, it sounds like you need a China-centric OEM Agreement.
- You 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 make a lot of trouble for you by suing or threatening the new manufacturer, etc.
Now for the “suing all the lawyers” part. In most of these instances where the tech company has pretty much just relinquished its by far most valuable asset (the IP it took years to develop) to a Chinese company, the tech company was represented by an American lawyer. And in most of those instances — or so we have been told — the American lawyer told its tech client that it would be able to save it money by using their existing lawyer for “the basic agreements” and then using a “more specialized China lawyer” when necessary. But as you can see from the above, the American lawyers are too often guessing badly wrong on the “necessary” part of this equation. In fact, most of the time, it is the tech company, not its American lawyer, who finally makes the decision to call us, and that usually happens when the tech company starts sensing something is going wrong with its China situation.
So it is with regret that I am now going to start adding a fifth option to the four I list above:
5. Consult with your local malpractice lawyer about suing your lawyer who led you to believe he or she was qualified to assist you in dealing with China and then allowed you to get into the really bad situation in which you now find yourself.
The post Worthless China Contracts: First, Let’s Sue All The American Lawyers appeared first on China Law Blog.
By Benjamin Shobert*
Over the last decade, I have found one of the most interesting questions to ask executives and policymakers about China is “can China innovate?” Biases come forth once the question is answered, both from those who tend to be over-optimistic about China, as well as those who are perennially bearish. Let the conversation unspool itself long enough, and you almost always find the group talking about deep culture, educational institutions, and hierarchy in China. Inevitably, the response lands on the role of government and its capability to actually incubate innovative industries.
Whether you agree with the idea that government in any form – whether autocratic or democratic – has a role fostering innovation, the Chinese government clearly believes it can be successful doing so. Admittedly, “success” as defined by the Chinese government on this topic is measured not purely by a conventional return on invested capital, but also through a number of intangibles such as political stability, moving the Chinese economy up the high-technology manufacturing curve, and what the “made in China” brand means to both domestic and foreign consumers.
The point often lost in discussions about whether or not China can innovate is that when China brings its attention to a particular innovative sector, it disrupts where R&D takes place, it creates a new geographic locale where commercialization can be attempted, and it sets in motion a host of policies that complicate everything from market access to global trade accords. The best example of this in recent memory would be clean-technology; however, the culmination of a nearly two year long research project at the Seattle and Washington DC based think tank the National Bureau of Asian Research (NBR) shows that the life science sector could also face similar disruptions.
In fairness, our research also showed that many of the structural challenges that inhibit higher quality bench science activities in China specific to life sciences remain chronic. Xiaoru Fei and Joseph Wong, who contributed a significant part of our final research project note, “technology transfer among China’s universities equals less than 10% the rate of foreign universities. In general, Chinese universities are not lacking in star scientists who publish in first-rate academic journals; however, they do lag significantly in technology transfer.” (page 10) This will come as no surprise for those familiar with the unique fixation Chinese academic institutions have on publishing papers as the primary metric that ensures promotion.
The life science sector needs a unique ecosystem to succeed. Other national economies have struggled to achieve their own success in similar pursuits, in large part because they equated investment capital and infrastructure with successful outcomes. The painful reality is that success in the life sciences requires strong investment in more than just infrastructure coupled to a long time horizon. China’s various life science incubator parks around the country are, like so much that defines China today, bright, shiny and new. They are also under-utilized, in part because they lack the type of robust connections to academic institutions, access to a transparent and scientifically robust CFDA approval process, an immature venture capital sector, and perhaps most critically, a chronically under-funded domestic drug reimbursement scheme that would reward innovation.
China’s attention on the life science sector may prove fleeting: China’s party cadres are initially motivated to follow through on the central government’s policies especially when these policies require digging holes and pouring concrete. This is why so much has been made of all the new biotech park capacity that has sprouted up across the country. But, the mid-term attention span of these same party cadres evaporates if the sectors in question do not become tax-paying entities. When you have both, the provincial and municipal governments will pay particular attention to fostering the sector in question. Life sciences does not map onto this objective as cleanly as other sectors such as telecom or clean-technology. The payoff for investments in bench science for biotech is much longer, and the risk to reward ratio is much greater than other industries that have a more obvious manufacturing component where China’s top-down approach has proven to be both disruptive and successful.
The challenge in all of this is to recognize that our politicians and policy makers are not always as adept as their counterparts in business when it comes to thinking about China. Yes, China’s pursuit of a domestic life science industry constitutes a threat to some established interests, but only if this sector’s needs in the US are neglected and key reforms required here are allowed to go unaddressed. As I write towards the end of my section in the analysis, “The United States’ current political environment for economic planning struggles to adapt to the realities of the globalized world that the country’s businesses and entrepreneurs must compete within, which contrast sharply with how politicians wish the world would be….Rather than look for the ways in which the Chinese model of fostering innovation may have lessons for U.S. policymakers, the current political climate in the United States has made recrimination the path of least resistance.”
High technology sectors such as the life sciences are only marginally safer from Chinese competition than other parts of the global economy where China has proven to be a disruptive force, for both good and bad. As western businesses rightfully chase the market opportunity in China, so too must western politicians and policymakers aggressively develop and implement policies design to ensure their domestic markets remain competitive as the globalized world begins to level yet another playing field western stakeholders had long assumed was safe from competition.
* Ben is my go-to person on big issues relating to China health care and life sciences and when I saw that he had just completed his work on a two year in the making report on China’s life sciences sector, I asked him to write something on that report for us. He graciously agreed. When not writing deep-think life sciences reports, Ben engages in health care consulting through Rubicon Strategy and writes on Asia health care for Health Intel Asia.