In a surprising decision the Supreme People’s Court of China gave Michael Jordan a partial victory in his long-running trademark battle with Qiaodan Sports. As I wrote last year, Jordan has been trying for years to cancel trademarks he alleges Qiaodan Sports registered in bad faith, including the marks “乔丹” (the Chinese-language version of “Jordan”) and “Qiaodan” (the pinyin version of 乔丹). Previously, Jordan has lost at every step of the way; the Trademark Review and Adjudication Board and various Chinese courts have all rejected Jordan’s argument that “乔丹” was already well-known and associated with him personally at the time Qiaodan Sports filed its trademarks.
But the highest court in China today ruled that in fact “乔丹” was well-known and associated with Michael Jordan personally, and that therefore Qiaodan Sports’ trademark registrations for “乔丹” should be invalidated. I have not seen the decision yet but from what has been reported in the Chinese media, the decision does not include any rationale; it just announces the outcome, leaving us to draw our own conclusions.
It’s tempting to see this decision as a harbinger of better times for foreign companies seeking to protect their brand in China. Particularly in light of the recent decision in favor of Donald Trump that similarly recognized the word “Trump” as being well-known. But I would be cautious about taking that view, for several reasons.
First, this decision and the Trump decision were for trademarks that were associated with a person’s name. For some time now, Chinese courts have been more likely to protect a trademark that is a person’s name (versus a random company name). Even a few years ago, Jordan would have had no trouble invalidating a trademark squatter’s application for “Michael Jordan.”
Second, Jordan only won a partial victory. Although the court found “乔丹” was well known and associated with Michael Jordan, it also found that “Qiaodan” was not. It’s difficult to rationalize the distinction. Presumably the court determined that (1) Jordan is too common a name to register as a trademark and “Qiaodan” is the standard pinyin transliteration for that name, and/or (2) any number of Chinese characters could be put together to form “Qiaodan” and therefore the connection was too tenuous. But these arguments are rather flimsy; if you look in a Chinese dictionary, the only word that the pinyin “Qiaodan” resolves to is “乔丹,” which has a single meaning: the name “Jordan.” Why grant protection to “乔丹” but not “Qiaodan”?
Third, this decision was decided on narrow grounds. Though the court ultimately accepted the argument that “乔丹” was well known and associated with Michael Jordan, it rejected his argument that Qiaodan’s registrations were “detrimental to socialist morals or customs, or having other unhealthy influences” or acquired by “improper means.”
Fourth, this decision is anomalous under current China trademark practice. The vast majority of Chinese trademark decisions are still coming out in favor of trademark squatters, and it is all but impossible to prove that a mark filed by a trademark squatter was well-known in China at the time of the application. It’s hard not to share the cynical view that something else is going on below the surface here. But maybe it’s as simple as that the case was heard in front of a sympathetic chief judge.
The Supreme People’s Court’s decision is final and cannot be appealed further. So while Qiaodan Sports can no longer use “乔丹” on its goods, it can continue using “Qiaodan” for as long as it wants, without threat of further interference. Jordan may be claiming victory in the press, but he can’t be happy that Qiaodan Sports will get to use “his” name forever.
Because this decision was so unexpected, the immediate consequence is to introduce even more uncertainty to the trademark registration process. Probably many more owners of allegedly “well-known” marks will be encouraged to begin invalidation proceedings in China. I can’t say I blame them, but it’s not much of a strategy. The only realistic way to establish trademark rights in China is to file a trademark application in China.
In the original post in this series, Getting Money Out of China: It’s Complicated, I wrote on how incredibly frequently Western companies have been seeking the help of my firm’s China lawyers in an (often desperate) effort to get money out of China so they can get funds due to them on all sorts of deals. On our China Law Blog Facebook Page, I linked over to the original post and described it as “In which we begin to answer THE question everybody is asking.” That has turned out to be no exaggeration as that Facebook post alone has generated nearly 10,000 views. And the requests for help from American and European companies seeking assistance in getting paid from China show no signs of letting up. But as I noted in part 2 of this series, most of the requests deal with purchasing single family homes in the United States and “slapping together 3-5 single family homes and calling it a fund is not likely to make a difference with the Chinese government allowing money to leave!”
In part 2, I discussed how the Chinese government seems to apply a three part test in determining whether to allow funds to leave China to go to a Western company. Based on the many deals on which our China attorneys have worked, and the reports we get from our clients and their bankers and financiers, and from China consultants and bankers and financiers with whom we regularly share information, we see legitimacy and benefit to China and deal structure as the three key elements. In part 2, I looked at legitimacy. In part 3, I looked at the “benefit to China” element. In this post, part 4, I look at what is actually happening in China that is slowly down payments from China. In part 5, I will look at what has historically been the primary reason why foreign companies face China payment problems: how they structure and write up their deal. That post will also provide tips to increase your odds of getting paid.
It is widely believed that China recently changed its rules regarding outgoing funds, but that is not really correct. China’s regulations on sending money out of China have not changed. There is no limit on the amount a compliant Chinese company can send abroad. But Chinese banks — acting on instructions from Beijing — are becoming much stricter with remittances. This new strictness has come about in an effort to limit capital outflows and to make sure taxes are paid in China before money leaves the country.
Chinese law generally requires a Chinese company to obtain a “tax certificate” from its local tax bureau before more than USD$50,000 worth of RMB can be converted into a foreign currency and remitted abroad. As the name might suggest, the certificate confirms that the Chinese company has made all necessary tax payments on the money or has some kind of exemption for the money. To obtain the certificate the Chinese company needs to submit copies of the relevant contracts (and oftentimes invoices) and provide particulars of the transaction. The tax certificate must be presented to the foreign exchange bank before the payment transaction occurs.
The regulations provide for a blanket $50,000 exemption from approval. No proof or justification is usually required for up to the $50,000 limit. However, we are getting many reports of Chinese banks denying requests for RMB conversion of amounts below the $50,000 limit.
Sometimes, the real problem, especially with larger remittances, is simply that the Chinese company can’t get a tax certificate, or doesn’t want to get a tax certificate, because that would require it to pay taxes it wasn’t planning on paying. To be fair, problems sometimes arise when the Chinese company genuinely wants to make a remittance and is prepared to pay the applicable taxes. These problems vary depending on the type of payment. They mostly affect payments for services, royalty payments and Foreign FDI or M&A payments. Payments for the purchase of goods are generally not as complicated, so long as the foreign side has its own paperwork in order as well.
In my next post I will discuss what you can in structuring your deal and drafting your contract to improve your odds of getting paid in full.
I will on December 16 be speaking in one of my favorite cities on one of my favorite topics: How to protect your IP in and from China. My talk will focus on protecting intellectual property related to hard03ware and Internet of Things Products (IoT), but it will have uniform application to pretty much any product or service.
My talk is a Hardware Massive Event (a truly great group — I spoke at Hardware Massive-Shenzhen just last month), and Hardware Massive describes it as follows:
Our featured speaker will be Dan Harris, the founding member of Harris Bricken (www.harrisbricken.com), an international law firm with offices in Seattle, Barcelona, Beijing, Portland, and San Francisco that focuses on representing European and American companies overseas and foreign (including Chinese companies) in the US. Dan writes and speaks extensively on international law, with a focus on protecting foreign businesses in their overseas operations. He is also a prolific and widely followed blogger, writing as the co-author of the award-winning China Law Blog. www.chinalawblog.com
Dan has been interviewed on international law issues by Fortune Magazine, The Wall Street Journal, Fox News, CBC, BBC World, Forbes Magazine, and CNN, among others. A number of his articles on international law have been published in leading publications, such as the Wall Street Journal, Bloomberg Law Reports, Forbes Magazine, and the National Law Journal.
Talk Description: Whether producing goods in China or selling to the Chinese market, foreign companies that engage in business with China need to know how to protect their technology and other intellectual property from being counterfeited, pirated, or otherwise misappropriated. There are substantial risks companies must identify and address to protect their valuable IP assets. Deals made in China can threaten IP rights not just in China, but in markets around the world. Understanding the Chinese IP landscape and how to manage the pertinent issues can go a long way to safeguarding your valuable IP interests.
A recent Quartz Magazine story stated that the best way to deal with China IP theft is basically to enjoy it because there is little you can do about it. Chinese companies will do everything they can to relieve you of your IP, and our speaker does not dispute that. But instead of just allowing your IP to be taken, Dan vehemently contends that your taking just a few rather basic legal steps can protect your IP. It doesn’t make sense for you to go through all the trouble to create and develop your product just to give it away. In his talk, Dan will discuss ways to protect your IP in and from China. He will provide methods that are doable and that actually work, even for startups having their products made in China.
The event agenda is as follows:
17:45-18:00: Registration & Networking
18:00-18:10: Opening Remarks by Ignasi Pascual
18:10-19:00: Dan Harris: “How to Protect your IP from China” w/ Q&A’s
19:00-20:00: Drinks w/ Networking and 1-on-1 questions
For more information about this event, please go here. I hope to see you there!
In the original post in this series, Getting Money Out of China: It’s Complicated, I wrote about how incredibly frequently Western companies have been seeking the help of my firm’s China lawyers in an (often desperate) effort to get money out of China so they can get funds due to them on all sorts of deals. On our China Law Blog Facebook Page, I linked over to the original post and described it as “In which we begin to answer THE question everybody is asking.”
That has turned out to be no exaggeration. That post has already had nearly 8,000 views and over the weekend, I alone received four reporter queries and nearly a dozen e-mails from people asking for help to get money out of China. I assume that were I to survey my firm’s China attorneys they would report something similar. But as I noted in part 2 of this series, most of the requests deal with purchasing single family homes in the United States and “slapping together 3-5 single family homes and calling it a fund is not likely to make a difference with the Chinese government allowing money to leave!”
In part 2, I discussed how the Chinese government seems to apply a three part test in determining whether to allow funds to leave China to go to a Western company. Based on the many deals on which our China attorneys have worked, and the reports we get from our clients and their bankers and financiers, and from China consultants and bankers and financiers with whom we regularly share information, we see legitimacy and benefit to China and deal structure as the three key elements. In part 2, I looked at legitimacy. In this post, I will examine the “benefit to China” element.
There is no doubt in my mind that a key element to money leaving China is simply whether the Chinese government wants the money to leave for its intended purpose or not. Nothing scientific here and it is more art than science, but based on my experience and my conversations and my gut feelings, I would rank the likelihood of the Chinese government approving your deal in roughly the following ways.
- Near certain the money will leave deals. We have many clients who sell their products and their services to China for less than $10 million at a time, using China-centric contracts, and I cannot recall a single instance where any of them have had any trouble getting paid. These are real deals with real contracts with real parties with real pricing and it is pretty clear China so recognizes these and has little to no problem with them. These are the deals that help keep China businesses running smoothly. For what you need to do to make your contract work on these deals, check out Selling Your Product or Service Into China: The Contract Basics.
- It depends deals. Technology licensing deals fit into this category. The Chinese government wants its companies to acquire Western technology, but it is not clear that it wants its companies to pay too much for this technology, especially if a denial of payments will mean the Chinese company can pay less. For more on what is involved in doing a China technology transfer deal, check out Three Myths of China Technology Transfers and China Technology Transfers: The Relationship and Deal Structure Myths.
- It really really depends deals. Chinese companies investing in Western companies. Yes, you can read about this or that Chinese investment deal getting done, but you should know that many of these deals do not involve money going from Mainland China to the West: they involve money going from Hong Kong to the West. In trying to determine the odds of your deal going through the first question to ask is from where the money will be coming. If your Chinese counter-party has $200 million in an HK bank account and your deal is for $150 million, then what the Mainland will say about your transaction obviously becomes less important. But if you are counting on the money coming from the PRC, the nature of your business could well be determinative. If the investment is going to be in real estate, your odds are not good because it is difficult to argue how a Chinese company sending $150 million to the United States to buy a couple apartment buildings there will benefit China. But if the investment is going to give the Chinese company access to a technology needed or desired by China, the odds just went way up.
- Are you kidding me deals. We are not aware of a single instance where the Chinese government has said, “yes sure, go ahead and send that $5 million so you can buy a luxury condo in Vancouver or New York.” Sorry.
Determining whether money can come in on a specific deal — even when it is legitimate and the contract is good — is more art than science and nobody can get it right every time. For this reason, our advise is always to assume that getting the money will be difficult and act accordingly. We give this advice even for our lowest risk clients: the product sellers. See Payment Terms When Selling TO China: Possession Is Ten-Tenths Of The Law. This means setting up your deal to reduce your risk of not getting paid and to reduce your risk if you fail to get paid.
What are you seeing out there?
Getting money out of China. It is super complicated.
In yesterday’s post, Getting Money Out of China: It’s Complicated, I wrote about how incredibly frequently Western companies have been seeking the help of my firm’s China lawyers in an (often desperate) effort to get money out of China so they can get funds due to them on all sorts of deals. On our China Law Blog Facebook Page, I linked over to the original post and described it as “In which we begin to answer THE question everybody is asking.”
That has turned out to be no exaggeration. That post has already had nearly 5,000 views and despite it being the weekend, I alone have received two reporter queries and at least a half dozen e-mails from people asking for our help to get money out of China. I can only assume that were I to survey my firm’s China lawyers that half dozen number would be at more than a dozen. Again, though, most of the requests deal with the purchasing of single family homes and, people, slapping together 3-5 single family homes and calling it a fund is not likely to make any difference with the Chinese government allowing money to leave!
In this post, I will discuss the three factors the Chinese government uses to allow funds to leave China to go to a Western company. Based on the many deals on which our China attorneys have worked, and the reports we get from our clients and their bankers and financiers, and from China consultants and bankers and financiers with whom we regularly share information, we see legitimacy and benefit to China and deal structure as the three key elements. In this post, I will address “legitimacy.” In subsequent posts, I will address the other factors.
By legitimacy we mean exactly that. If a China company needs a $5 million dollar piece of industrial equipment for its factory and it pays $5 million for that industrial equipment, the deal will almost certainly go through. My law firm has a number of U.S. and European clients who sell this sort of equipment and for whom we have drafted contracts that work and none of these clients have reached out to us with any problems. Nor has any other company selling such equipment legitimately.
Just to repeat. Chinese company needs $5 million in industrial equipment to make its factory run better, the Chinese government will almost certainly allow the money to go through. Why then do we get so many calls and emails from U.S. and European (usually for us, German or Italian or Spanish) companies who are not getting paid for their industrial equipment sales? Two reasons. Bad contract and an appearance or a reality of illegitimacy. I will save the contract aspects for a later post and address just the legitimacy element in this one.
Here are the situations where we have seen problems on what should be a routine equipment purchase:
1. The foreign company is selling the $5 million piece of equipment for $8 million. Come on. If you have sold your $5 million piece of equipment to China five times in the last year for $5 million and now all of a sudden you are selling it for $8 million, the Chinese government is going to assume that you have some sort of side deal with your Chinese buyer to funnel some large portion of the $3 million extra to a bank account held by the owner of your Chinese buyer in your home country. When we have been armed with evidence to the contrary (perhaps you have added all sorts of bells and whistles to the $5 million machine, for example), the odds are good on your eventually getting the money out. But if you are in fact planning to push over the $3 million or so extra to your Chinese friend, the odds are not so good that the money will ever leave China.
2. The foreign company is selling the $5 million piece of industrial equipment to an advertising agency in China. Come on.
3. The foreign company selling the $5 million piece of industrial equipment has never sold anything to China previously and the Chinese company buying the $5 million piece of industrial equipment has never previously bought anything similar from overseas before. If your deal is truly legitimate, you ought to be able to prove it and you ought to be able to get paid. If your deal is really just a scam, your odds are really more. Note: our China lawyers love taking on the former type of matter but we will not take on the later.
4. The foreign company selling the $5 million piece of industrial equipment is wholly owned or largely owned or even partially owned by an ethnic Chinese. Call it discrimination or call it whatever else you want, but we often see deals involving ethnic Chinese on the foreign side held up to much greater scrutiny by the Chinese government. I first wrote about this Chinese government criteria back in January of this year, in Getting Money Out of China: What The Heck is Happening?
Get this one: Money will not be sent to any company on a services transaction unless that company can show that it does not have any Chinese owners. The alleged purpose behind this “rule” is again to prevent the sort of transactions ordinarily used to illegally move money out of China. Never heard this one until this month.
Things were a lot better in January and this criteria has only become more real. There are various completely legal things that can be done to alleviate this problem and improve your odds on this one, but it would be better for our firm’s clients that I not mention them here.
Bottom Line: When I wrote yesterday’s post on getting money out of China, I envisioned a two, maybe a three part series. The deluge of questions I have received just since then has convinced me that this issue is too pressing, too important, and too multi-dimensional to be contained in a series that short. This seems to be THE big issue right now and we plan to write on it until we have exhausted it. So keep your questions coming.
For the last few months, I alone have been averaging a call or email a day from someone inquiring about getting money out of China. I had three phone calls and one email on this topic yesterday (and woke up to two more such emails this morning), and they run the gamut.
Two of yesterdays calls were highly typical. One was from a realtor wanting to know how the Chinese buyer of a two million dollar house could get her money out of China to pay for it. The other was from the General Counsel of a large housing construction company with essentially the same question, but more general.
I try to make the single house purchase calls as short as possible and I do that by spewing out the following as quickly as I can:
China law forbids anyone from sending out of China more than USD$50,000 in any given year without government approval and it is virtually impossible to get this approval to buy a house overseas. So the odds are overwhelming that we will not be successfully in helping this person get more than $50,000 out of China and we are not going to help in getting the money out illegally. There are sometimes some legal workarounds, but for us to know if there are any in this case, we would need to be retained and we would need to know a lot more facts. And doesn’t it make more sense for your buyer to retain her own Chinese attorney in her hometown since she is Chinese and this is an issue of Chinese law?
Our China lawyers have been hired on single purchase house deals, but only by sellers who want to use our services to justify getting out of the deal with their Chinese buyers because they now have a higher offer on the table and they are tired of waiting. This makes sense.
My phone calls with the real estate company and the home building company lawyers last a few minutes longer. I tell those callers the same thing about the law, but I also tell them that in light of this, they should consider requiring larger initial nonrefundable deposits from overseas buyers.
Then there are the near daily emails from people who think that they have come up with THE solution for getting money out of China. These emails propose things like bitcoin, loans, company to company transfers and various other things, far too often with a tone that they have discovered the one method that can trump Chinese government restrictions and would I just confirm this for them. It was one of those that spurred me to write this post:
What’s the best way for a Chinese investor to send RMB out of China to the U.S.? We are setting up this transaction as a services deal from corporation to corporation.
That’s it. No explanation of the parties involved in the deal. No explanation of the deal itself. No explanation of the money involved. Not even really a question; just a statement as to how they are going to do the deal, and essentially a request that we bless it. Here is my standard response to these kinds of emails:
There is no way I can even come close to answering your question on the best way for a Chinese investor to get RMB out of China without knowing, at the bare minimum, the following:
1. The nature of the transaction.
2. The nature of the parties (a lot more than just their structures).
3. The histories of the parties.
4. The location of the parties.
5. The nationalities and even the ethnicities of the parties (especially the receiving party).
In our experience all of these things (and a whole host of other things) are factors in whether the Chinese government will allow money to leave. If you think just doing it corporation to corporation will get the money out, the odds are overwhelming that you will end up being sorely mistaken
The more legally interesting calls — and the ones on which our China lawyers can often help — come from Western companies facing the following sorts of situations:
- Western company selling some really expensive item (usually a piece of industrial equipment) to a Chinese company and the money isn’t leaving China.
- Western company waiting for funds to arrive on an IP licensing deal.
- Western company waiting for funds to arrive from a Chinese company which is supposed to be investing into the Western company.
- Western company waiting for funds in payment of services provided.
In part two of this series, I will analyze the above sorts of situations and set out the framework our China attorneys believe the Chinese government uses in deciding when money leaves and when it does not.
Because of this blog, our China lawyers get a fairly steady stream of China law questions from readers, mostly via emails but occasionally via blog comments as well. If we were to conduct research on all the questions we get asked and then comprehensively answer them, we would become overwhelmed. So what we usually do is provide a super fast general answer and, when it is easy to do so, a link or two to a blog post that may provide some additional guidance. We figure we might as well post some of these on here as well. On Fridays, like today.
We are often asked questions along the lines of “Where can I go to find out more about ________” When this question relates to Chinese law, we are rarely able to help because our China attorneys do their legal research in Chinese. And when the question is about something other than Chinese law, our China attorneys are rarely able to help because, well, we focus on Chinese law.
But earlier this week I received an email from one of our movie clients asking me if I was aware of where she might be able to find good writings on China’s movie and entertainment industry and, shockingly enough, I was because earlier in the week I had been reading Bridging the Dragon’s website. “Bridging the Dragon is an association connecting European and Chinese film industries” and its website maintains the following really sweet list and amazingly comprehensive list of “Useful Links” relevant to the China movie and entertainment industry:
China Law Blog — Hey, that’s us!
I am not aware of any China relevant movie/entertainment sites missing from this list, but if you are, please let us all know in a comment below.
In my previous post Three Myths of China Technology Transfers, I focused on the misconceptions Western companies so often have regarding China technology transfer deals. In this post, I focus on two commonly held misconceptions foreign technology owners have regarding “partnering” with Chinese companies.
Due to a partnership relationship, the foreign side often wrongly believes it is somehow better protected against IP theft. The foreign side then lets down its guard, only to learn that its China partner has appropriated its core technology. This sense of partnership is most common with SMEs and technology startups, especially those companies whose owner is directly involved in the relationship with the Chinese entity.
The two primary “we are partners” myths our China lawyers see are the following:
Myth One: Our personal connection will protect us. The Chinese company will not appropriate our technology because I (the owner of the U.S. company) have a close personal relationship with Mr. Zhang (the owner of the Chinese company). Usually this statement is followed with some bit of personal data, such as: “He came to my daughter’s wedding” or “I sponsored his son’s admission to college” or “I helped bring his family to the United States” or “He is my son’s godfather.” Trust me when I say our China attorneys heard them all. This idea that a close personal relationship will somehow insulate your company from China IP theft is probably results in more technology transfer disasters than any other myth about China. It is a myth for two quite different reasons:
On the most basic level, personal relations are not a barrier to committing acts of appropriation or other breaches of trust or contract. For most Chinese business people, personal relations, such as attendance at weddings and other shows of friendship are strategic matters, done to achieve some form of business benefit. When that benefit involves breaching a contract and appropriating technology, the Chinese side will do it without a second thought. I know my saying this will offend some people, but if you talk to almost anyone who has been doing business in China or with China for a decade or more and you will hear the same thing. This is not always true, but it is certainly true often enough that it cannot and should not be ignored.
When the foreign party points out that this is a breach of trust, the Chinese side will often reply with something like the following: “In China, business is like warfare and contract like a treaty between nations. We will honor the treaty when it benefits us, and we will breach when it benefits us. Personal matters are not relevant. As soon as we see a benefit, we will take it. The situation is really all your fault. You should not have presented me with a situation where I had the opportunity to betray you. By leaving me an opening, you forced my hand, because the rule in China is that when an opportunity presents itself the prudent businessperson must take advantage of it opportunity.”
I have many times heard a Chinese company owner state this sort of argument with a certain amount of bitterness. They actually say: “It’s your fault. You made me do it.” They resent you for having forced them to the friendship in a way that was painful to them. But again, the common Chinese view is that when a foreign company provides an opportunity to seize a benefit, the Chinese company is obligated to seize. Personal feelings do not count; action is required.
In many cases, however, the Chinese company owner has no reason to appropriate your technology, so it is safe not because of an emotional commitment but because there is no benefit from the theft. But, the technology is still stolen. This is because the technology is stolen by an employee of the Chinese entity.
In fact, for technology that requires a small investment to commercialize, theft by a Chinese company employee is probably the most common way foreign technology gets appropriated. This is particularly true of software products, where no large capital investment is required. In these low barrier to entry businesses in China, senior technical employees are constantly on the look out for an opportunity to steal technology and leave their employer to start out on their own.
This is part of the aggressively entrepreneurial mindset of Chinese technical personnel. Appropriating a nice piece of foreign software is often seen as the perfect way to get a head start on forming a new company. In the same way, if an employee can make off with a full set of production molds, he or she can start up a small factory at a very low cost in China. So the opportunities abound and the foreign technology disappears, leaving both the Chinese owner and the foreign entity frustrated as their mutually advantageous business relationship is destroyed by a low cost Chinese competitor.
Myth Two: Our partnership is secure because of investment by the Chinese side. We hear this argument a lot and it is essentially that it is not necessary to formally protect the technology because the Chinese company plans to invest significantly in the foreign company.
This argument has two variants, both of which are false:
Variant Number 1: The Chinese side plans to purchase a majority ownership interest in our company. In effect the Chinese side will own the technology in the end. Since the Chinese side will eventually own it, there is little reason to try to protect it from appropriation by its future owner. In this way, the Chinese side convinces the foreign entity to transfer the important technology to the Chinese entity prior to the date with the investment occurs.
But, then, there are always delays in closing that investment transaction and in many (most?) cases the full (sometimes any) investment never occurs. The Chinese side assures the foreign entity that the investment funds are on the way; the delay is only temporary. In the meantime, the Chinese entity obtains all of the relevant technology. Finally, the Chinese side announces that it sincerely regrets the transaction cannot be concluded. There is always some good reason. Either the bank that was going to finance the investment deal got cold feet or the Chinese government withdrew its approval of the transaction at the last minute. Either way, the deal is off with no liability on the part of the Chinese side. But the Chinese side got what it wanted. It obtained the key intellectual property without having to pay anything approaching market price for it.
Now that Chinese companies are perceived as wealthy, this investment promise has become a standard technique Chinese companies use to convince foreign companies to drop their guard. The way to prevent the unfortunate result is simple. Up until the day the purchase transaction closes and the funds are clearly in your bank account, treat the Chinese entity as a neutral third party. Protect your intellectual property in exactly the same way you should (or at least would) if you were dealing with an unrelated third party. The Chinese side will complain about the expense and inconvenience, and your reply should be: if you do not like it, pay the money now.
Variant Number 2: The Chinese side will purchase a minority interest in your company, just to provide support for developing the technology. In this variant, Western companies believe protection of their intellectual property is not required because: “Why would the Chinese company want to harm the interests of a company in which it is a part owner?”
This argument assumes that the Chinese company sees greater future benefit in the earnings it will get from its minority share of the U.S. entity as compared to walking away with the American company’s technology. The U.S. side often tells us that “when we go public, the Chinese side’s share will give them a huge profit. Why would they screw things up now and prevent that public offering from ever happening?”
The Chinese side rarely sees it this way. First of all, few Chinese companies focus on the long term. So for many, the promise of a future IPO or other monetary benefit from their minority investment means little or nothing to them. Second, when the Chinese side makes a minority investment, they do not see it as a investment in stock. They are making the payment to hire the foreign entity to do research and development work on their behalf and usually what they pay for such work (via the minority investment) is far less than they would pay for an arm’s length R&D program.
The investment in this R&D work is valuable to the Chinese company, but only to the extent it can take control of the technology. So the Chinese company will invest in the foreign development efforts for only so long as it receives direct benefits in the form of transfer of technology. The Chinese side has no intention of allowing the underfunded foreign start up to commercialize that valuable technology. Instead, the Chinese entity will transfer the technology to one of its many well funded subsidiaries for entry into the market. Normally, the Chinese entity expects the foreign start up to then simply die. They do not see this as a loss of their investment. Instead, they figure they see themselves (usually rightly) as having received an excellent return on their payments. It paid the money and the foreigners did the development work which it (the Chinese company) now owns. That is the end of the analysis.
The solution here is the same as the solution for Variation 1. Treat the Chinese entity like you would any third party entity. Disclose as little as possible to the Chinese entity and thoroughly protect what you disclose. If the Chinese side continues to seek access to your technology, consider carefully why it is making such requests. A normal investor does not need such information. If the Chinese side is asking you for more than a normal investor would ask, you have to ask why. The answer will almost certainly be that the Chinese company wants access to the intellectual property underlying your technology and it wants that for its own use.
In this situation, if the Chinese side complains or says something like “Don’t you trust us? We’re your partner.” This is sure sign of trouble. If the Chinese side requests access to your proprietary technical information, you have to ask: why are they making such a request? The real reason is seldom what you will want to hear.
Bottom Line: Do not be lured into believing that the nature of your relationship with your Chinese counter-party or the structure of your deal will be enough to protect your intellectual property from being appropriated. Or as my co-blogger, Dan Harris, always likes to say: Be careful out there.
During the recent presidential campaign, President-Elect Donald Trump said “we can’t continue to allow China to rape our country” and vowed to aggressively fight back against China’s unfair trade practices. Trump promised his trade agenda would:
- Declare China to be a currency manipulator
- Impose a 45 percent tariff on all Chinese imports into the U.S.
- Abandon/ renegotiate “bad” trade agreements such as the Trans-Pacific Partnership (TPP), and
- Use the full arsenal of US trade laws against Chinese unfair trade practices.
The above proposed trade actions raise many legal and policy questions. Can a President Trump really do those things? Should he do those things? Will such actions achieve anything? Pundits, academics, lawyers, and ultimately U.S. judges will eventually weigh in on these questions for real, but China is not going to wait for the resolution of these questions. If the United States engages in some or all of the above Trump-proposed actions, China will no doubt retaliate with its own actions.
In this post I discuss three fairly likely ways China will respond attempts by a Trump administration to “get tough on China.
1. China’s AD/ CVD Actions. Few realize that China has already initiated its own antidumping (AD) and countervailing duty (CVD) actions against companies from the United States and other countries. Having been on the receiving end of the bulk of AD/CVD actions worldwide, China has incorporated into its own AD/CVD procedures some of the most effective techniques and practices from the AD/CVD investigations conducted by the U.S., EU, and other jurisdictions on Chinese companies. For example, China’s AD questionnaires have burdensome and comprehensive sales and cost data requests, similar to, and even in some cases, exceeding US practice. China’s AD/CVD margin calculation methodologies are as non-transparent as the EU’s margin calculations. China has even copied many of the annoying administrative practices of the US and EU ,such as giving only limited extensions, disregarding national holidays, and insisting on burdensome filing requirements, like requiring all documents filed be fully translated into Chinese. It’s accident that my law firm’s trade team works so closely with our China law team.
Though, most of China’s AD/CVD actions have so far been largely symbolic and usually initiated in response to specific U.S. actions against China. Though many of China’s AD/CVD cases have involved well-known companies (Corning, Dupont, Tyson Foods, and Cadillac, to name some), most have had only limited economic impact. However, more recent China AD/CVD actions are starting to have greater economic impact. After the US and EU filed AD/CVD actions against Chinese solar cells and modules in 2011, China initiated its own AD/CVD actions against solar-grade polysilicon from the United States, EU and Korea. China’s AD/CVD action effectively closed off the largest export market for US polysilicon producers, and was a significant contributing factor to REC Silicon’s decision to shutter its polysilicon production operations in Washington and Montana. REC Silicon just this month blamed China trade actions for its less than stellar third quarter revenues.
In late September, 2016, China announced preliminary AD duties of 33.8% and CVD duties of up to 10.7% against imports against U.S. distillers’ dried grains (DDGS), an ethanol by-product used as animal feed. The U.S exported $1.6 billion of DDGS to China in 2015. China also apparently also has an AD/CVD action prepared against U.S. soybeans exports to China and is just waiting for the right time to initiate that action. The U.S. is the largest producer and exporter of soybeans and U.S. companies exported over $10 billion of soybeans to China in 2015. If the Trump Administration gets tough against China, US soybean producers likely will incur massive collateral damage in an escalating US-China trade war.
2. China Antitrust Enforcement. China may also respond against U.S. anti-China trade actions by stepping up its enforcement of its antitrust laws against U.S. companies. China implemented its anti-monopoly law only in 2008, but it has become increasingly active in reviewing mergers and investigating abuse of market dominance. In February 2015, Qualcomm paid a $975 million fine to settle Chinese antitrust allegations of having abused its market dominant position. This year, China’s antitrust authorities have targeted pharmaceuticals, medical devices, vehicle manufacturing, ocean shipping, and smart manufacturing as industries of particular concern. Because these industries are already prioritized for extra scrutiny, China could relatively easily ramp up its antitrust enforcement actions against U.S. companies in these industries to retaliate quickly against U.S. trade actions against China.
3. China Criminal Enforcement. China might also retaliate against U.S. companies by more strictly enforcing its criminal laws against U.S. company officials in China. Earlier this month, China detained more than a dozen employees of Crown Resorts, Ltd, an Australian gambling company, and it will be pursuing criminal charges against at least three of them. See Foreign Executives Arrested in China: Please Do NOT Look Away. No one knows where and when the next China anti-corruption effort will occur, but foreign companies doing business in China in important or politically sensitive industries need to be extra cautious. Company officials need to know which way the wind is blowing in China, particularly when enflamed U.S. trade rhetoric may trigger a Chinese backlash. Our China lawyers are already hearing rumors that China is going to start criminally pursuing those who use independent contractors in China but have no company in China and pay no employer or income taxes in China. China might be planning this sort of action against smaller companies as a sort of warning shot against the United States. For more on what this situation looks like, check out China’s Tax Authorities Want You.
Though Trump has talked a lot about China, China itself has so far taken the high road, noting that U.S.-China trade relations are “too big to fail.” China appears to be waiting to see if Trump’s actions will in fact harm China. For example, the United States’ abandoning the Trans-Pacific Partnership (the TPP) has actually allowed China to step in and fill the TPP void by promoting its own Regional Comprehensive Economic Partnership trade agreement (RCEP).
If the United States starts engaging in trade tactics China considers excessive, it is naïve to think China will do nothing in return. China has a home market that is in many cases the biggest export market for US producers and China has many options under its own laws to directly or indirectly retaliate against U.S. interests. Anyone wishing to do business in China or with China should consider the risks of being targeted for retaliation in a spiraling US-China trade war and they should start preparing to try to minimize the fall-out from that.
Working hours for most China employees are usually determined under China’s “standard working hours system,” and in most places in China, that means a 40-hour work week — 8 hours a day and 5 days a week. This system does not allow for a lot of flexibility since work done outside the normal working hours is considered overtime that obligates the employer to pay overtime. I am finding that foreign employers are often (virtually always, actually) confused about China’s working hours and they often believe (and repeat to me) the following six myths regarding working hours and overtime in China, all of which are daily costing foreign companies extra money in China.
Myth 1: China’s overtime rules are similar to the exempt employee rules in the United States. Wrong. For example, it does not matter how much your China employee gets paid. Your China employee might be making three times the average salary in the city where you are located (this amount is a common threshold for a number of things under Chinese employment law). Generally speaking, you must pay all overtime.
Myth 2: Managerial employees are exempt from overtime pay. If a manager works under the standard working hours system overtime incurred must be paid. If your manager(s) have been approved to work under an alternate working hours system (usually the flexible working hours system) you can avoid paying overtime on most occasions, except for (and this depends on the locale!) time worked on a legal holiday such as New Year’s day, Chinese New Year, National Day, etc.
Myth 3: An employer and employee can contractually agree to have the employee work under an alternate working hours. Nope. Most places in China require prior government approval for an employee to work under a non-standard working hours system. The employee’s written consent alone is usually not sufficient.
Myth 4: Comp time can negate overtime obligations. Not necessarily. This depends on the employee’s situation and the locale in China. If an employee working under the standard working hours system stays beyond the normal 8 hour work day, you must pay overtime, which is usually 150% of that employee’s normal wage. But in most locales in China, an employee who works during a weekend can be compensated with comp time. However, if you are unable to give the employee comp time (perhaps because you mistakenly failed to do so or because you simply were too busy), most locales in China will require you pay 200% of the employee’s normal wage or 300% if the work was on a legal holiday.
Myth 5: An employee on an alternate working hours system needs never be paid overtime. Be careful. Again, this — like pretty much everything else employment related in China, depends largely on the locale. Most places in China require the employer pay even alternate hour employees overtime for time worked during a Chinese legal holiday. Also, we cannot even count the number of times a foreign employee has insisted that such and such employee is under the alternate working hours system and one of our China labor lawyers has discovered that was never the case or is no longer the case due to a failure to timely renew.
Myth 6: The employee (not the employer) is required to keep track of time for overtime pay. Tell this to the many foreign employers who thought this was the case and then ended up having to pay all sorts of back overtime pay when the employee has left, to avoid getting sued for having done so. You as the employer need to document what is going on with your employees on overtime and just because an employee has not yet hit you up for it, does not mean you don’t owe it. Your rules and regulations should contain a section setting out your company’s overtime policy, including your internal procedures your employees must follow for securing approval before incurring overtime and your procedures for reporting such overtime.
Bottom line: Make sure you understand the national, the regional, and the local laws that apply to overtime in the city in which you are located.
For more China employment myths, check out Six Myths About China Employee Probation.
One of the most common things our China lawyers do is help protect our clients’ IP when they first go into China. One of the most common subsets of that work is protecting our clients before they start to manufacture their products in China.
On that front, one of the things we virtually always discuss is what the client can do to protect itself from its own manufacturer by contract and overall in China from everyone (including the client’s own manufacturer) by registering their intellectual property in China.
The intellectual property we help our clients register can be an invention patent, a utility patent, a design patent, or a trademark or a copyright, all depending largely on the particular sort of intellectual property needing protection and the client’s particular situation and stage.
On the contract front, early on we typically recommend an NNN Agreement, a Product Ownership Agreement, a Product Development Agreement, and/or a China OEM Agreement (a/k/a a China Supply Agreement or a China Manufacturing Agreement) again, largely depending on the particular IP needing protection and the client’s particular situation and stage.
In an ideal world, our China lawyers work with our clients to pick and choose from the above with cost as now object. But rarely do our clients have unlimited budgets and so most of the time we have to work with them to determine which of the above are absolutely necessary, which of the above will have the most “bang for the buck,” and which of the above are not all that necessary or can wait.
One of the most common questions with which we have to grapple is whether our client should focus on its China IP registrations or its China manufacturing contracts. If the client has only enough funds for one thing, should it use those funds to register its trademark in China, its design patent in China, or to have an China-focused NNN Agreement it can use with all China companies to which it will be revealing its secret sauce?
Unfortunately, there is nothing even close to a one size fits all China IP protection strategy because there is nothing even close to a one size fits all China IP situation. So there is little I can tell you here about how to prioritize the above.
We would though love to hear from you-all on how you have prioritized your China IP protective measures and why you did what you did and, most importantly, how it has worked out for you.
Many technology transfer licenses in China fail. Though it may be true that not all Chinese companies plan from the very start to violate the terms of their licensing agreements, you must not ignore that many do. A fascinating thing though is that when Chinese companies plan to breach their licensing agreement with a foreign party, they almost always cannot help but reveal this from the outset.
A Chinese company that intends to violate a licensing agreement and run off with the foreign company’s IP will usually have a very clear plan. What the China lawyers in my office call the Standard Plan works as follows. First, the Chinese company will negotiate in a way that guarantees a weak license that cannot be enforced against them by the foreign party. The tricks used to do this are quite standardized. Second, the Chinese company will ensure that it does not make any (or else it makes very few) payments until after it has already received the technology. If the Chinese company makes any payment at all, it will make a minimal number of payments, usually late and in violation of the agreement and then once it has received enough of the technology it seeks, it will cease making any payments entirely.
When our China attorneys encounter a Chinese company clearly working on the Standard Plan, we warn our clients. However, it is also typical for our clients to nonetheless want to forge on ahead. The client will usually explain how their situation is unique and that means the Chinese could not possibly be planning to breach.
These explanations are often based on common misunderstandings about how China works, or on what so many call China Myths. Here are three of the many such myths I have heard from clients in just the past six months:
1. Myth One: The Chinese company will not breach our technology licensing agreement because it needs us. The usual argument is that the technology is complex and the application know-how is critical and the important/critical information will not be disclosed until the Chinese company has made its last payment. The problem with this argument is that even though it may be factually true that the Chinese company cannot successfully implement the technology without the final data and continuing support from the foreign licensor, what really matters is that the Chinese company believes otherwise.
Far too often the Chinese company is convinced that once it gets some relatively small percentage of the technology from the foreign licensor, it no longer needs the foreign licensor. First, Chinese companies commonly believe with respect to the technology itself that the whole package is not important; the only thing truly important is the magic formula. Based on this the Chinese company will seek to extract the magic formula as soon as possible in the transfer process and with as few payments as possible, and once it has done that, they see no reason to continue the relationship with their foreign licensor. The Chinese company believes (often with good reason) that once it knows some key portion of the technology it can just hire key engineers to assist them in the implementation phase for considerably less than it would cost them to continue making their licensing payments. And get this: many times the Chinese company will bring in your former employees and consultants and former employees and consultants from your competitors to do this work.
2. Myth Two: The Chinese company is acting this way because it is inexperienced or incompetent, not because it plans to breach. This myth is based on Western arrogance and it is the rare Chinese company that does not know how to exploit it. Our China legal team sees this myth in a number of settings, including the following:
- The Chinese company submits its response to a carefully crafted technology licensing agreement 2-3 days before the deadline for executing it. The document comes back from the Chinese company with substantial revisions to the agreement terms, but with no redlining and no explanation.
- Immediately after executing the technology transfer or the technology agreement, the Chinese side insists on assigning the agreement to a newly formed subsidiary that has no assets.
- When the Chinese company’s payment is due, it reports that the bank has imposed restrictions that either make its payment impossible or that require substantially revising the agreement. And no surprise, the revisions the Chinese company contends must be done to free up payment are the exact revisions it sought but was denied during the technology license negotiations. The Chinese company will then press for the foreign company to continue transferring technical information while this payment issue gets resolved.
When we describe the above tactics as standard tools of the Standard Plan, used almost by rote by Chinese companies planning to breach their license agreement our clients will sometimes counter by arguing that these are not indicators of an intent to breach, but rather just mistakes that reveal the Chinese company’s lack of international experience and general incompetence.
This argument is based on a myth and it is seldom correct. First, Chinese companies are not incompetent. They know what they are doing just as much as Western companies and on international technology licensing agreements, probably better. If you can read Chinese, you can go to any bookstore in just about any Chinese airport and find books (yes plural) that explain exactly how to take advantage of Western companies on technology licensing deals. Second, Chinese companies are not inexperienced in the procedures that apply in international technology transfer agreements. Tech transfer has been a core of Chinese business since 1981. Chinese companies, together with their lawyers, bankers and government/private consultants know exactly how the system works. What is true is that Chinese companies know exactly what to do to get Western companies to let down their guard and give them what they want. In this way, Chinese companies that intend to breach are masters at fooling foreigners into thinking (wrongly) that they are inexperienced and incompetent. Our Chinese lawyer friends readily (and laughingly) admit all of this to us.
3. Myth Three: The Chinese company will not breach this technology transfer agreement because it takes a long view of business and it will not want to sour relations for the future. This myth is based on a general view that due to their long history, the Chinese take a long term view toward business relations. This is often explained by some vague reference to a Confucian ethic that still underlies Chinese culture, even in the PRC, a communist country.
This is just a cultural stereotype not based on recent Chinese history. I am not going to discuss Chinese culture or Chinese history in this post, but I am going to tell you what I have seen over the decades in which I have been providing legal representation on Chinese transactions (coupled with what the other China lawyers have seen in their practices as well) and that is that Chinese companies — if anything — tend to take the long view far less often than the Western companies (mostly North American, Latin American, European, and Australian) I represent. In fact, many of the Chinese business people I know and with whom I speak (in Chinese) are very skeptical about the future and tend to evince a “get it while I can” attitude about business, particularly when dealing with foreign companies, who tend to come and go and have little power or even relevance. Benefit now is real, calculation for the future is for suckers. See Is There A Chinese Mindset, And So What If There Is?
These are three commonly held myths by foreign companies that do technology transfer deals with Chinese companies. They are not true; they do not reflect reality. If you are negotiating with a Chinese company based on any of these myths, you will likely fail. Don’t do it.
So in the last three months I have received a couple of emails from students in international law schools in China asking me about their job prospects. My responses have been anything but encouraging, to the point that I feel it would be wise for me to publicize my counsel.I fear this is true of this subset of China law schools
Here is somewhat of a merger of the two emails:
I am ________________, a third year student of International law at ______________ University in China. I am a ___________ citizen and I will be graduating next year.
_______________ contacted me for an interview about “Going to school in China” and during our conversation, I mentioned that our university is not helping us find an internship. Moreover, we as foreigners are not allowed to practice law in China. That is why I couldn’t answer him when he asked me about my future plans. I frankly have no idea if my degree will be recognized abroad or where should I be doing my internship. He recommended your blog to me and also suggested I ask you for some advice.
I would be highly obliged if you could advice me on where I should look for an internship and how. Our university wants us to have an internship of minimum two months. I am also studying Chinese language along with my degree here. Our course is taught in English but they also give us Chinese classes. I can say my Chinese is good enough to carry out normal conversations with Chinese people.
It would be really helpful in to find a good job after my graduation if I can find an internship in an international law firm before my graduation.
Really looking forward to your suggestions!
Because one of the students had been referred to me by a China law professor/China lawyer I know, I felt some obligation to do some brief research regarding the situation and I found the following:
- There are international law schools (at least one anyway) in China that teach Chinese law to students from all over the world, with English as the language of instruction.
- These students believe that upon graduation they will be readily employable by “international law firms” seeking new lawyers knowledgable about Chinese law.
- The students who graduate from these law schools cannot sit for the China bar.
- As far as I know, the students who graduate from these law schools cannot sit for any bar in the United States either. In fact, near as I can tell (though I certainly may be wrong about this), these students cannot sit for the bar in any country in the world.
- If I am right about #4 (and nobody has yet told me I am wrong on this), this means that graduating from one of these law schools does not help you to become a lawyer.
- Even if graduates from one of these law schools can sit for the bar in some country somewhere, I can only imagine it will be extremely difficult for any of these graduates to get a good law job. These law schools do not have any reputation anywhere (as far as I know). I am an active and long time China attorney who has the additional benefit of people constantly contacting us because of this blog. Yet I did not even know of the existence of these schools (Again, I am aware of only one such school for certain, but I hear there are others) until only very recently.
What is going on here? Do I have my facts right? People, please help me (and anyone considering one of these China law schools) out here.
As the end of the year is fast approaching, regardless of whether you are conducting a year-end employer-employee audit, now is a good time to update and refine your China employee rules and regulations. As this is usually (and should be) a much longer document than your employee contracts, doing this will probably take a fair amount of work. To make this task just a little bit easier, I suggest you focus on the following eight basic things to do to whip your China employee rules and regulations into shape for the new year:
- Make sure the Chinese version of your document is in tip-top shape. Far too many companies have a non-lawyer translate their rules and regulations into Chinese and far too many companies therefore have Chinese language rules and regulations that are not appropriately written for a court or other tribunal. Make sure this is not the case for yours and while you are doing so, check it for typos, etc. You should also make sure that your Chinese version lines up with your English version. For example, if your English version says “do not”, and your Chinese says “do,” you know there is something wrong (I see this sort of basic error all the time when conducting employer-employee audits.
- If your company’s rules and regulations are in Chinese only, you really should have an English translation done. You as the employer will need to refer to this document when you make most employee decisions and unless all of your employees who will be making these decisions are fluent in written Chinese, you need a well-written version in English as well.
- Focus first on the sections of your rules and regulations that matter most to your managing your China employees. This means you can for the most part gloss over any mission statement. Focus instead on sections where any failure to follow that which is written will get you into big trouble. When I am asked by a company to review their rules and regulations to let them know if it will work for China, the first thing I look at is the section on disciplinary actions because it is that section which is so often litigated. If that section is not well-crafted, I immediately know revising the rules and regulations is in order.
- If there is a section of your rules and regulations on which your employees are frequently commenting, questioning or voicing their concerns, this is a section you should be reviewing and probably revising.
- If you are seeing employee infractions that are not well addressed or addressed at all in your rules and regulations, put something in there for those or fix what is already there. Do this before one of your employees commits this infraction again you find yourself (again) in a situation where you are powerless to do something about it.
- Make sure you use the appropriate word/phrase in your rules and regulations to actually accomplish what you are seeking to accomplish. If you want to impose an obligation on your employees, make sure you use the word “must” and as noted above, make sure the Chinese version also says “must.” Saying “employees are expected to do something” does not usually cut it, and yet our China employment lawyers see language like this all the time in rules and regulations. If all you want to do is encourage your employees to do something, fine, but your rules and regulations are almost never the best (or even the right) place to do that. The rules and regulations are called rules and regulations for a reason and they should be used to clearly delineate what your employees must do and must not do and to make clear the repercussions for violations. If your rules and regulations say “DO NOT DO XXX!!!”, and then do not make clear that doing XXX will lead to termination, you likely cannot legally terminate an employee who does XXX no matter how large the font or how many exclamation points you use.
- Remove from your rules and regulations anything that no longer complies with China’s ever shifting labor laws. And when I say China labor laws, I mean any applicable national, regional or local law. See China Employment Law: Local and Not So Simple. Just by way of one very common example: if your rules and regulations provide for termination for an infraction that is not a terminable offense where your employees are located, there is a good chance you will engage in ineffective terminations that waste your company a lot of time and money by creating unnecessary employee-employer disputes.
- Make sure your rules and regulations clearly spell out incentives, bonuses and benefits and if your rules and regulations say that you will be providing any of these, you really should provide them. Well over half the rules and regulations we review or audit need substantial cleaning up of these provisions and a good portion of the China labor law disputes on which our China labor lawyers are retained involve
Bottom line: If you have employees in China, resolve to clean up and improve upon your employee rules and regulations by the New Year.
On this Thanksgiving Day, we want to take a time out to express those things related to China for which we are thankful. Just to be clear, we are focusing on China, not because we think China takes priority over everything else (because it does not), but merely because this is a China blog. So with that caveat, here goes:
1. We are thankful for our readers, here and on our Linkedin and Facebook pages. We are thankful for your loyalty and we are especially thankful for being able to interact with you. We are thankful for your comments and your emails, from which we learn all sorts of new things and from which we are challenged. But most of all, we are thankful and we are honored that you trust us for your information. Before we even started this blog, way back in January, 2006, we wrote the following Mission Statement for it:
We want to start a conversation with, for and about the person who wants practical information on starting and growing a business in or involved with China.
We will be challenging various misconceptions the West has about law in China, including that the law in China does not really matter or that guanxi can supplant it. We will help you figure out how you can use the law as both a shield and a sword. We will give insights to achieve practical solutions, while doing our best to entertain. We know lawyers are not popular, and though we are ourselves really quite likable, we recognize the need to avoid those things that incite lawyer hatred. We will strive to avoid legal jargon and namby-pamby language that attempts to camouflage our views or to avoid controversy.
We want our blog to be a place for both conversation and controversy. We expect many of you will disagree with us much of the time and we are fine with that. We will always strive to avoid boring you or being unwilling to take a stand. We are not going to be afraid of being wrong—in fact, we want you to tell us when and how we are wrong. If you want “legalese” or long strings of caveats, you are going to have to pay exorbitant legal fees to get that elsewhere.
We will tell you more than just that the law is this and this is what needs to be done to comply. We will discuss how the laws as written may say one thing, but our experience dictates something else. We will tell you when you need to do more than just follow the law to succeed, and we will set out exactly what that something else is. We will regale you with stories about the Chinese lawyers with whom we work, the foreign and Chinese businesspeople with whom we deal, and even the places we go. There will be times where our lawyer ethical rules will make us unable to name names, but we will always work to tell the full story.
It has become a blog cliché to implore readers for their input, but it is so important we must join the crowd on this. We do not purport to know everything about Chinese law. That is impossible. Our strengths are forming companies in China, drafting international contracts with Chinese companies (in English and in Chinese), intellectual property protection and international litigation and arbitration. We welcome your comments, suggestions and ideas on any area of law relating to conducting business in China. China is anything but monolithic and we will be relying in large part on you, our readers, to round out this site with your own stories.
In plain language, we ask that you write us early and often. We will review your comments before we post them, but that does NOT mean you should not criticize us or disagree with us. Our review will be to filter out comments that are without substance and/or personally abusive. We want to encourage a high level of discussion, but we will not ban or delete your comments just because you come after us.
You, our readers, have exceeded our wildest dreams by not only commenting often, but commenting with intelligence.
2. We are thankful that whenever relations between the United States seem to be on the brink, both countries seem to re-realize the importance of the other and pull back, even if just a little.
3. We are thankful for each and every award we have received, both as China bloggers and as China lawyers because we know none of those would have been possible without you.
4. Most of all, we are thankful for all the great friends we have made through this blog and through our work, who are far far far too numerous to mention. You are our everything.
Again, thank you from all of us (both in the U.S. and in China) to all of you!
May each and every one of you have a Happy Thanksgiving.
In China to Charge Three Australian Crown Resorts Executives The Wall Street Journal (Wayne Ma) reports that Chinese authorities will be pursuing criminal charges against at least three employees of Crown Resorts Ltd., an Australian gambling company. The article states that three Australians — among 18 people initially detained last month — remained in custody in Shanghai and …. [that one] of the Australians detained was Jason O’Connor, vice president of Crown Resorts’ international VIP operations. The status of the other 15 taken into custody is not clear.
As noted in the article by Peter Humphrey, who himself served time in a Chinese prison for alleged violations involving corporate investigations, “after someone has been charged, ‘the chances of getting them out have diminished by several times,’ said Mr. Humphrey, who maintains his innocence. ‘Whoever laid these charges now has a political stake in making them stick,’ he added.”
The kicker in all this actually comes from a quote by co-blogger Steve Dickinson in this Bloomberg article:
“In the old days, people would insist to me that the only risk was deportation. This is no longer the case,” said Steve Dickinson, a lawyer at Seattle-based Harris Moure, which produces the China Law Blog and has advised companies in the gaming sector. “Foreigners can expect to be treated exactly like Chinese nationals.”
And here’s the thing about the Crown case: the Chinese government had for some time been signaling its intentions:
Under Chinese law, casinos aren’t allowed to promote gambling in China. Organizing a group of more than 10 Chinese nationals to go to casinos overseas also is a crime.
Overseas casino operators sidestep that ban by marketing only their hotels and entertainment in public promotions.
The detainments appeared to be foreshadowed last year in comments made by Hua Jingfeng, deputy chief of China’s Ministry of Public Security.
Mr. Hua told reporters that his department was investigating a “series of cases” involving foreign casinos in China.
“Overseas, a few countries are treating our country as a big marketplace,” Mr. Hua said, adding that he was aware overseas operators were establishing offices in China with the goal of luring citizens abroad to gamble.
Eight months later, Chinese authorities arrested more than a dozen South Korean casino managers and a number of local agents allegedly for the practice.
Why should you not look away from this post if you are doing business in China? Because it is vitally important to you and to your company that you understand that China will arrest and imprison foreigners and that it has only become increasingly willing to do so.
In a post we wrote back in 2014, China’s Anti-Corruption Drive. What Next? we mused about China’s then nascent anti-corruption drive what it all might mean, and we noted the following:
- China is serious about corruption and it is starting with the pharmaceutical industry because corruption is so entrenched there. China is going after both domestic and foreign companies, but we are just hearing more about the foreign companies. This is just part of China’s desire to reduce corruption because the Chinese people are really sick of it.
- China is doing what it always does, which is killing the chickens to scare the monkeys. The foreign companies are the chickens and the domestic Chinese companies are the monkeys.
- Nobody really knows where and when the Chinese government will strike next when it comes to corruption. We all just know that it is striking a lot more often than it used to and striking against a much more varied list of companies (the smaller foreign companies that have gotten hit have for the most part managed to stay out of the news).
- If you are a foreign company doing business in China in an industry the government deems important or politically sensitive, you should be extra worried/cautious.
- Be careful out there and make sure you do whatever you can not to have your company become a China statistic. For help on that, check out that score check out The Double Standard “Tax” On Foreign Companies Doing Business In China. What To Do?
And here’s the latest rumor we are getting: China is going to start criminally pursuing those who earn income in China with independent contractors in China and no company in China and who pay no employer or income taxes in China. For what this situation looks like, please check out my Forbes article, China’s Tax Authorities Want You (written before we started hearing of criminal implications).
So whatever you do, please don’t look away. Better yet, have a full-on audit done of your company to ensure there is nothing lurking there.
For more on the Crown Resorts case and the lessons to be learned from it for anyone doing business in China, check out Doing Something China Doesn’t Like? Don’t Go There and How To Avoid Getting “Detained” in China and Why Your Odds are Worse than you Think.
In China Product Development: Focus on Manufacturing Rights, I set out the ideal resolution of product manufacturing rights issues that arise in co-development projects in China. As I noted in that post, in our experience it is often difficult to convince the Chinese side to agree to that ideal option. So what do you do when the Chinese side refuses to agree? You have a number of options, including the following:
Option 1: License the underlying technology from the Chinese side. When the Chinese side takes the position that it will retain the rights to the underlying technology in your product, your next step is to try to negotiate a license to that technology. This kind of license is common around the world, and it can take many forms, including the following:
a. Negotiate a standard license for the underlying technology for which you will pay a license fee. You can pay this fee as a lump sum or as a per unit royalty for each item manufactured in a separate facility. In some settings the license payment is based on purchasing a certain number of units at a premium price. After that amount has been paid, the foreign party then has a license to manufacture elsewhere. This standard license approach is a very common procedure around the world, but it is seldom used in China. As Chinese manufacturers become more sophisticated about monetizing their technology, this type of agreement will become more common, and our China lawyers are already starting to see that happen.
b. Negotiate an agreement with your Chinese manufacturer side that allows you the freedom to manufacture the product in a different facility, but only if your Chinese manufacturer is unable to meet predetermined quantity, delivery date or price terms. Often this license will allow manufacturing in a different facility only for amounts in excess of a predetermined minimum. For example, the Chinese factory may produce 100,000 units per year at a set price and the foreign party is permitted to use a different facility only to manufacture anything in excess of 100,000. The flaw in this approach is that it assumes the Chinese side will be capable of manufacturing the first 100,000 units, both in terms of quantity and quality. Where this is not true, this leaves you as the foreign product developer hostage to the Chinese factory, which can be financially devastating.
Option 2: Walk away. It is surprising to me how many times foreign hardware entrepreneurs fail even to consider the basic option of refusing to work with a Chinese company that will not cooperate on key manufacturing rights issues.
It is critical to understand what the Chinese side means when it states it will under no circumstances release the manufacturing/IP rights in a co-developed product. What the Chinese side means is: We own the product. We will manufacture the product and we will allow you to sell the product on our behalf in a foreign market. If you succeed, great. If you do not succeed, we will simply refuse to accept your future purchase orders. We will then either market the product ourselves or we will engage some other company to market the product. That “other company” will normally be an established player in the market, and not a mere start-up like you. In other words, you will be reduced to becoming essentially the Chinese company’s sales agent and you will be subject to being terminated even for that at any time.
Most start ups are looking for new money. Consider how hard it is to raise new money when you are in the situation where you have no control over “your” product. Since the result will be an economic disaster, it is often best to simply walk away when it is clear that the Chinese side is trying to put you in an untenable situation.
Option 3: Turn the tables. Some foreign developers do not walk away because they feel they have no other option; they think they are forced to work with the Chinese manufacturer. Though this situation is dangerous, it can work so long as the foreign entrepreneur is willing to turn the tables and operate how a Chinese company would operate in the same situation.
In the turn the tables approach, the foreign developer basically “writes off” the co-developed product. The product is not treated as the foundation for the start up company. Instead, the co-developed product is treated as a research project that will provide the foundation for an entirely new product. For this new product, the foreign product developer will work to achieve control over the technology and the manufacturing rights. It may take several rounds of development, but the goal of the foreign developer is always to achieve complete product control, using the Chinese manufacturer as a test bed for developing a new technology.
Many foreign product developers are confident that they can pull off this reversal of roles. They tell me that they will not walk away because they have this plan. In my experience, it is quite difficult to turn the tables on Chinese manufacturers. Chinese manufacturers have been using this strategy themselves for many years and they usually can see what is happening in time to take early action to protect themselves. However, if well planned, this strategy can be successful. The key is in the planning. If the plan is not laid out clearly from the very start, there is very little chance of success.
In China’s new two-child era, couples are allowed (even encouraged) to have two kids, but no more, unless an exception applies.
Can an employer in China unilaterally terminate an employee who is having more than two kids or otherwise violates the relevant laws on family planning and population control? This is an easy question to answer regarding employees of state-owned enterprises and government agencies. Employees at such organizations are subject to more stringent regulations because they are government employees and they can by unilaterally terminated for having more than one child.
The question that most concerns China employment lawyers and China employers alike is what can privately owned companies do in this situation. As is so often the case when it comes to China employment law, the answer(s) is localized and complicated. For example, Shenzhen generally prohibits employers from unilaterally terminating an employee for violating family planning laws, but it also gives its employers some leeway by allowing them to deal with this issue in their employment contracts, collective contracts and/or their employer rules and regulations. But since the basis for my statement regarding the rules in Shenzhen are based on seminar minutes from a Shenzhen Human Resources and Social Security Bureau meeting minute, the legal authority for even this in Shenzhen is somewhat unclear.
It is also important for any employer in China to understand that because female employees are a special class for whom Chinese laws provide extra protections, unilaterally terminating a pregnant employee is almost always going to be more difficult and problematic than it may first appear under the written laws and regulations. For this reason, when our employer-clients seek our counsel on unilaterally terminating a pregnant employee we nearly always seek out alternatives, including usually a mutual termination with an appropriate Chinese language settlement agreement. See China Employee Termination: Avoid These Mistakes.
A related question is whether an employer can put in its rules and regulations that violating relevant family planning laws warrants employee termination. As noted above, such a provision may hold water in Shenzhen, but not necessarily elsewhere in China. Many cities in China are of the view that because the employee who has violated China’s family planning laws will be or already is facing fines imposed by the authorities overseeing family planning and population, it would be too harsh to also allow the employee to be unilaterally terminated for the same thing, no matter what is in the employer’s rules and regulations and no matter how “flawless” the termination. Beijing used to split on this question, with some of its labor bureaus believing that employers may rely on their rules and regulations to fire an employee for violating China’s family planning laws, while others held the opposite position. Around the time of International Women’s Day in 2015, Beijing’s Second Intermediate Court made clear its position in a press conference: employers cannot unilaterally terminate employees for violating China’s family planning laws. An employer may discipline such an employee (but not terminate her), provided there is an applicable provision in the employee rules and regulations. In other words, if you have no such rules in place, you do not even get to discipline the employee. However, whether this Court pronouncement settles the issue even for Beijing is still unclear.
In a follow-up post, I will discuss what China employers can and cannot do regarding various other protections (overtime, workload adjustments, etc.) normally provided to pregnant employees, when one of their employees violates China’s family planning law.
In yesterday’s post, China Employee Terminations and The New Two Child Policy, I discussed how the laws vary in China regarding whether an employer can terminate an employee for having violated China’s family planning laws. In this post, I address whether an employee’s violating China’s family planning laws allows the employer to refuse to provide the extra protections normally provided employees during pregnancy, such as no overtime or an adjustment of workload?
As is nearly always the case with any China labor law issues, the answer varies by locale, but generally speaking, a pregnant/nursing employee who violates China’s family planning laws should should be treated the same as other pregnant/nursing employees while on the job. However, other benefits after childbirth, such as paid maternity leave can generally be withheld from an employee who has violated the family planning laws, though this too varies by location.
I should emphasize how important it is not to try to remove an employee’s legal protections by having them sign a contract that purports to do so. A recent case out of Shanghai (a fairly employer friendly city) makes this clear.
In this case, an employee entered into an employment contract with her Employer on her first day: March 1. This employee was required to fill out an employee form before she officially started. As she was not married at that time, she checked the box for “single” on the form. The Contract expressly provided that if any information provided by the employee was untrue, the employer would have the right to void the contract and unilaterally terminate the employee. The employer’s handbook contained similar provisions and also required its employees update the employer within 10 days if any personal information, such as marital status had changed. The Employee became pregnant a few days after her first day and started going to checkups but she never informed her employer about her pregnancy until October.
The Employee married in May and her employer approved her marriage leave. A couple of months before her expected due date, the employee provided her employer with a doctor’s note saying she would need to go on maternity leave because she would need to rest before her scheduled C-section. The employee requested paid maternity leave, but her employer immediately terminated her because she had “deceived” them by not providing accurate information about her personal situation. The employer then brought a labor arbitration claim against the employee seeking to declare her employment contract void. The employee filed counterclaims demanding her salary during her sick leave and maternity leave, as well as double statutory severance for unlawful termination and reinstatement of her position.
The employer lost on most of the claims and was ordered to pay the employee her salary during her sick days and during her maternity leave and also to pay for her social insurance until the last day of her extended maternity leave. The court acknowledged that the employee should have updated her employer on her marital/pregnancy status sooner, however, nothing she had done justified her unilateral termination. The labor arbitration committee did not discuss the employee’s claim for double statutory severance for unlawful termination and because the employee withdrew her claim for reinstatement of her position and did not argue for unlawful termination severance at the court level the labor arbitrators did not discuss those claims either.
The arbitration panel stated in its first sentence of its decision that “employees’ legal interests are protected by law” and female workers “giving birth is a natural and legal right and must be accorded full protection.” Though this case was decided before China’s new two-child policy and though some of the legal aspects of this case has changed, what has not changed is that it is simply not possible to remove most worker protections via contract. Most importantly, what also has not changed is the importance that you as a China employer should know and follow all of the relevant laws and regulations and rules (national, regional, and local down to your specific district within your city) before terminating or even penalizing one of your employees.
In yesterday’s Quick Question Friday, China Law Answers, Part XXXV, I posed what is probably the single most common question our China lawyers get from our fellow lawyers: “What should we put in our dispute resolution provision in the contract we are drafting with a China company.” And then I very briefly explained how there is no one fits all answer and that the right dispute resolution clause should be determined based on a totality of the circumstances. I also promised to expound on that answer today, and so here goes, part I of how to draft the right dispute resolution clause for your particular situation.
The dispute resolution provision you put into your China contract may be the most important provision in the contract. If you put in a dispute resolution provision that makes sense, your Chinese company counter-party with whom you are contracting will be afraid to breach the contract. Conversely, if you put into the contract a dispute resolution provision that will not work, you are signaling to your Chinese company counter-party that it can breach its contract with you with impunity. Yes, it really is that important.
In fact, whenever I am asked to review a contract between a US company and a China company, the first provision I look at is the dispute resolution clause. Far too often when I am asked to review such a contract, it is by a new client who did not use one of the China attorneys at my law firm to draft the contract and I am now being asked to review the contract because something has gone wrong and the new client wants to know what it can do. I review the dispute resolution clause first to see if there is even any point in determining the strength or the weakness of the US company’s claims against the Chinese company. If the contract calls for litigation in the United States, before a US Court and the Chinese company has no assets in the United States, the quality of the case just went way down.
China does not enforce US court judgments. It just doesn’t. Since China will not enforce any judgment that you receive from the US court, your winning in the US court will likely be meaningless. Getting a US judgment against a Chinese company with assets only in China is of no use. Getting a US judgment against a Chinese company that has assets in the United States or in some other country that will enforce a US judgment (Korea and Canada spring immediately to mind) might have some value. This means though that if you have an existing contract that requires disputes between you and your Chinese counter-party be resolved in a US court, you probably have a contract that does not work and you should be seriously considering trying to negotiate a new contract.
Way back in 2006, in Enforcing Foreign Judgments In China — Let’s Sue Twice, we wrote about how a typical phone call goes when someone calls us for help enforcing their US judgment in China:
Caller: I have a two million dollar judgment against Chinese company X in China, can you help me enforce it?
Me: Is it a default judgment here in the United States?
Me: Chinese courts do not enforce United States’ judgments and they don’t give any credence whatsoever to United States default judgments. Did you discuss this possibility with your U.S. lawyer before you sued here in the United States?
Caller: [long silence] …. Yes. He told me getting a judgment here couldn’t hurt?
Me: Did your lawyer charge you to get it?
Caller: Yeah. I had to pay him and I had to pay all sorts of people to get that company served in China.
So much of the time in your China contracts, it will make sense to draft a dispute resolution clause with your Chinese counter-party that calls for disputes to be resolved by a Chinese court (or sometimes by arbitration in China or outside of China).
In the next post in this series, I will discuss the pros and cons of using arbitration outside China (foreign aribitration) to resolve your contract disputes.