Chinese IP

China Employee Leaving Employment Early. Forget About Payment In Lieu Of Notice

China Law Blog - 11 hours 41 min ago

China allows employees to terminate labor contracts by giving 30 days written notice to the employer during the standard employment term or 3 days written notice during the probation period.

Our clients occasionally ask us whether it is permissible under Chinese law to require an employee to pay a certain amount of money (代通知金 or 代替通知金) to an employer, when the employee tries to terminate the labor contract without prior written notice. We have received inconsistent responses from a few cities’ labor bureaus, but it seems the majority think that would be illegal, and putting such a provision into an employment contract would be illegal as well.

To be clear, the phrase “代通知金” is nowhere to be found in China’s Labor Contract Law. The concept does exist in the Law though: for example, Article 40 provides a list of circumstances under which an employer may terminate an employee without cause but must either give a 30 days’ written notice or payment of an additional month’s salary to the terminated employee.

As indicated above, it seems that payment in lieu of notice may only be applied to an employer, and that requiring an employee to pay in lieu of notice is not in line with PRC labor laws. One major reason is that China’s Labor Contract Law was intended to make it relatively easy for employees to terminate labor contracts. Employees should be able to get out of an employment relationship simply by giving prior written notice and, perhaps more importantly, they should be able to do so without a penalty. Therefore, any additional obligation on the part of the employee would violate the spirit of the law, even if the employee has some choice in the matter.

Some practitioners also believe that an employee “payment in lieu of notice” constitutes a penalty under Chinese laws, which are fairly strict about when an employer can impose a penalty on an employee. Specifically, China’s Labor Contract Law allows only the following two circumstances when an employer and an employee can agree on a penalty provision payable by the employee.

  • Pursuant to an education reimbursement agreement, an employer can require that the employee reimburse the company for the education expenses if the company pays major expenses for an employee’s employment-related education or training, but after the training is complete, the employee quits.
  • Pursuant to a non-compete provision or agreement, an employer can require an employee pay a penalty to the company if the employee violates any non-compete terms by, for example, joining a competitor after leaving employment.

China’s Labor Contract Law makes clear that except for the two circumstances above, an employer and an employee may not agree on any provision that requires the employee to pay a penalty to the employer.

Bottom Line:  The safest thing for you to do as an employer is to require your employees give 30 days prior written notice during the standard employment term, and 3 days written notice during the probation period, for early termination of a labor contract, and not to provide or take money in lieu of that.


Categories: Chinese IP

China IP Panel. University Of Akron. Tuesday, September 30.

China Law Blog - Fri, 09/26/2014 - 20:10

On Tuesday, September 30, I will be part of a panel at the University of Akron Law School discussing intellectual property in China. This panel is part of the school’s China Week. My panel starts at 3:00 p.m. and is scheduled to run until 5:15.

Intellectual Property Law Professor Ryan Vacca will be the moderator and Patrick Coyne, an IP litigation lawyer out of DC, and Todd Tucker, an IP lawyer based in Cleveland, will be joining me on the panel.

Our panel is titled, “Business and Legal Culture in China: From an Intellectual Property Perspective,” and I hope to see some of our readers there. This will be my second Ohio speaking engagement in just the last few months and there is a good reason for that: a large portion of our China clients come from the Midwest because there are so many manufacturing companies there.

Categories: Chinese IP

“Hiring” Your China Employees Through A Staffing Agency. What To Do.

China Law Blog - Thu, 09/25/2014 - 18:20

With the costs and the hassles of forming and operating a WFOE in China always increasing, we are finding more of our clients are choosing to retain personnel in China via third party staffing agencies. Doing so is relatively easy and relatively inexpensive, assuming you can find a third party staffing agency willing to do the hiring.

When one of our clients has decided to go the third party staffing route, we write them an email along the lines of that below.

The way to proceed with hiring your quality control inspectors through a staffing agency is as follows:

  • Inform your QC inspectors that you will soon be getting them employed through a staffing agency, both to let them know and to find out if they have any particular issues with your doing things this way.
  • Find a staffing agency to help with this. Our lawyers in China have contacts at two of the larger agencies and we would be happy to make introductions.
  • Once you settle on a staffing agency, the staffing agency will prepare two sets of agreements: one between your company and the staffing agency, and one between the staffing agency and each of the QC inspectors.
  • I recommend that you have one of our China lawyers review and revise both sets of agreements. Generally speaking, the staffing agencies use boilerplate agreements that contain mistakes and inconsistencies.
  • If the QC inspectors will be privy to trade secrets or other confidential information, I recommend that you have us draft separate individual confidentiality agreements between the QC inspectors and your company. Although the staffing agency agreements usually contain confidentiality provisions, such provisions are almost always inadequate.
  • It is also important to have these inspectors sign off on your company rules and regulations, including especially those relating to ant-bribery and kickbacks. It also usually makes sense to draft provisions relating to more mundane things like hours, work locations and methods of supervision and communication, since there is no set office procedure for this kind of “employee.



Categories: Chinese IP

China Government And China Business. It’s Different.

China Law Blog - Thu, 09/25/2014 - 00:30

My friend and fellow lawyer Stan Abrams just did a thought provoking post, entitled, Comparative Red Tape: China vs. U.S. To grossly oversimplify it, its thesis can be summed up as follows:

I suppose my major point here, that the U.S. and China governments are different, is painfully obvious.

But it really is a more complex than that.

The post starts out citing an article that quotes someone saying that it is easier to get help from a China bureaucrat than from an American one. When I saw that, I immediately got irritated, because though true, there are all sorts of reasons why this is the case, and most of those reasons in no way reflect badly on American bureaucrats.

Stan then compares California to China and notes how much faster and easier it is to register a company in California than in China. One can form a U.S. company in less than an hour, whereas forming a China WFOE typically takes months.

Where I really see the difference between California and China bureaucracies is the different role government plays between the two countries (yes, I know California is a state and not a country, but work with me here people). China’s bureaucrats are tasked with increasing investment, foreign or otherwise, and their pay/bonuses can reflect how well they do that. American bureaucrats are mostly tasked with staying out of the way of incoming business.

One way I can explain the difference is the way we lawyers deal with a Chinese bureaucrat versus a US bureaucrat, and the differing expectations we have of them. Let’s take employment law as an example. One of our China lawyers, Grace Yang, has been writing extensively on here regarding China employment law, including the following just this month:

Without going back and checking these posts or checking in with Grace, I can still state with confidence that she spoke with Chinese government officials regarding all of the issues in the blog posts above. I know this because she dealt with all of these issues for real clients and before we report back to our clients on labor law issues we pretty much always those issues with the local labor department in addition to reviewing the written laws.

Chinese bureaucrats are pretty much uniformly willing to tell you how their agency handles particular matters and they will do so without your having to reveal the name of your client. The bureaucrats simply view helping clarify Chinese law as part of their job. This is generally a good thing.

The opposite is the case in the United States. If you go to a US court clerk’s office, you will probably see a sign making clear that the clerk is not able to give any legal advice. I am not aware of other government agencies in the U.S. with similar signs, but the sentiment is for the most part the same: if you don’t know the answer, hire your own lawyer and figure it out, our job is not to figure out anything for you. Businesses get help from private sources, not the government. Citizens should not be subsidizing businesses.  This is not necessarily a bad thing; it is the American ethos.

Where you really see the difference between the US and China is in foreign investment, which is the focus of Stan’s post. Chinese companies come to the US expecting trade agencies to help with all sorts of legal matters, but they virtually never do. On the flip side, when we tell our clients that we will be sending one of our China lawyers to talk with someone at a government office regarding a law or a problem, our clients sometimes become concerned that we might be doing something illegal. We explain that what we are doing is not only perfectly legal, it is normal for China and not to do so would be bad lawyering.

What have you seen out there?

Categories: Chinese IP

How To Terminate A China Employee Non-Compete Agreement. Very Carefully.

China Law Blog - Tue, 09/23/2014 - 05:58

China allows for non-compete agreements that prohibit high level employees from working for another company that competes with the employer. However, these agreements are generally limited to senior management, senior technicians and other personnel who have a confidentiality obligation to the company. In exchange for the employee’s promise to maintain the non-compete requirement, the employer is required to pay economic compensation to the employee. After an employee has left his or her company, the company oftentimes would prefer not to continue paying the employee and thereby bring an early end to the non-compete agreement.

Pursuant to the Judicial Interpretation IV of the Supreme People’s Court on Several Issues Concerning the Application of Law in Hearing Labor Dispute Cases (“Judicial Interpretation IV”), employers that unilaterally terminate a non-compete agreement during the non-compete period must pay the employee with the non-compete agreement three additional months’ salary for the early termination. In other words, employers cannot just walk away from their previously signed non-compete agreements without a penalty. Our China lawyers frequently see non-compete agreements that purportedly allow the employer to unilaterally terminate the agreement by giving one month’s notice to the employee. As explained above, this runs afoul of Judicial Interpretation IV.

Note though that some labor bureaus refuse to comment on the application of judicial interpretations. Some (like Shanghai) say they still refer to the PRC Labor Contract Law as their guideline. The Shanghai Labor Bureau is of the view that neither party can unilaterally terminate a non-compete agreement during the non-compete period. The Shanghai authorities base their position on the basic contract law principle that agreements generally require mutual consent to be terminated. The Labor Contract Law does not address this issue. As with the compensation required for an employee non-compete agreement, even though Judicial Interpretation IV is supposed to supersede all the local rules, it is nonetheless advisable to check with the relevant authorities to figure out the applicable rule is as we are still seeing quite a lot of local differences.

Judicial Interpretation IV provides no guidance on how employers can terminate a non-compete agreement during the employment term (i.e., before the non-compete period begins). Some practitioners believe that given the pro-employee approach of Judicial Interpretation IV, it is likely that an arbitrator or court would mandate that the employer pay three months’ compensation. On the other hand, it could be argued that because terminating a non-compete agreement releases the employee’s non-compete obligation even before the non-compete period has begun, the employer should not be obligated to make any payment because the employee never performed his or her obligation not to compete.

Note also that Judicial Interpretation IV gives employees the right to unilaterally terminate a non-compete agreement, provided the following conditions have been met:

(1)   The employee has performed his or her non-compete obligation;

(2)  The employer has failed to make compensation payments for three months or longer;

(3)   The failure to pay the employee was caused by the employer itself. In other words, the employee cannot prevent the employer from making payment so to avoid the employee from having to perform his or her obligations.

Bottom Line: Once the non-compete period has begun, employers cannot terminate a non-compete agreement without being subjected to a penalty. Since it is unclear whether this also holds true for an employer terminating a non-compete agreement during the employment term, we recommend inserting a provision into your non-compete agreement or employee contract making contractually clear exactly what will happen with an early termination of your non-compete agreements.




Categories: Chinese IP

China’s Super Consumers And How To Sell To Them.

China Law Blog - Mon, 09/22/2014 - 05:58

Just finished reading the book, China’s Super Consumers: What 1 Billion Customers Want and How to Sell it to Them, by Michael Zakkour and Savio Chan. It’s a great book and highly for anyone with a product or a service that is being sold or could be sold to China’s consumers. It is also a very good book for any foreign company doing business in China or looking to do so.

Amazon (for once) beautifully and accurately describes what this book is about:

China’s Super Consumers explores the extraordinary birth of consumerism in China and explains who these super consumers are. China’s Super Consumers offers an in-depth explanation of what’s inside the minds of Chinese consumers and explores what they buy, where they buy, how they buy, and most importantly why they buy.

The book is filled with real-world stories of the foreign and domestic companies, leading brands, and top executives who have succeeded in selling to this burgeoning marketplace. This remarkable book also takes you inside the boardrooms of the people who understand Chinese consumers and have had success in the Chinese market.

  • A hands-on resource for succeeding in the Chinese marketplace
  • Filled with real-world stories of companies who have made an impact in China
  • Discover what the Chinese consumer wants and how to deliver the goods
  • Written by Savio Chan and Michael Zakkour, two leading experts on the Chinese market

This book is an invaluable resource for anyone who wants a clear understanding of how China’s Super Consumers are changing the world and how to sell to them.

Yep, that nails it.

The book is written in the sort of clear, helpful, no-nonsense style eminently appropriate for this sort of business book. Though the book makes clear that the opportunities for selling into China are great, the risks of doing so are also great, particularly for newcomers who believe China is no different from the Western countries from which they came. The book also does not just just follow the crowd when it comes to analyzing China. Much of what it says is truly original and clearly discerned from decades of experience. Mike started in China with a Chinese company that sold pig leather coats and the owner of the company had Mike spend weeks at a Chinese pig farm as his introduction to the company. That sort of background helps.

My personal favorite part of the book (of course) was the part that quotes me. The section is on using e-commerce to sell into China and here to, it nicely describes both the opportunities and the potential pitfalls. It lays out the following “challenges” for brands and retailers:

  • Fierce competition and a crowded marketplace.
  • Confusion about what platforms are available and best suited to their needs.
  • Finding the right mix of third-party platforms, owned and operated e-commerce platforms, and consumer-generated commerce.
  • Assuming you can enter and succeed in China with an e-commerce-only plan.
  • Supply chain infrastructure, especially warehousing, e-fulfillment, cross-country shipping, and last-mile delivery.
  • Controlling intellectual property (IP), parallel imports and graymarket issues.

It then has this to say about the IP challenge:

China law-expert Dan Harris, author of the influential and award winning China Law Blog, says, “Companies who are selling in China need to make registration of their trademarks, copyrights, and other intellectual priority their first priority.” He continues, “China is a first-to-file country, not first to use, so whether you are selling or making something in China, without up-front IP due diligence and action, it is not a matter of if you will get infringed upon, but when.

The danger is exponentially worse online. Our lawyers spend a good chunk of their time trying to remedy IP infringements generated though e-commerce, but many companies are learning that spending on prevention is cheaper than spending on remedies,” said Harris.

Let’s be clear, explicit and blunt: If you put your products up for sale online in China and you have not registered your trademarks, copyrights and all other IP in China, You no longer own it. Someone else does.

Bottom Line: Buy China’s Super Consumers: What 1 Billion Customers Want and How to Sell it to Them if you have a product or service for China.

Categories: Chinese IP

Why Alibaba Is Good For China VIEs

China Law Blog - Sun, 09/21/2014 - 13:39

Our China lawyers have a long history of skepticism regarding China VIE structured entities.  In Buying Into A China VIE. What Me Worry? we had this to say about them:

Years ago, we here at China Law Blog made clear our views on VIEs and nothing about those views has changed.  For that reason, and because VIEs have little to nothing to do with most companies doing business in China, we stopped writing about them years ago.  In a nutshell, we don’t like them, don’t trust them, and don’t do them.  Quite frankly, our malpractice insurance just isn’t high enough for the massive risks we see in these investment vehicles.  We simply believe that when push comes to shove, China’s courts simply won’t enforce the contractual agreements that are necessary to support such a structure.

V.I.E.’s have for the most part worked just fine for China and this likely will not change, until there is a problem. And that itself is the problem. To make up a Yogi Berra quote, there is no problem with V.I.E.’s until there is a problem. Problems arise if the Chinese partners decide to cease abiding by the contracts any longer because, for example, they already have the money and know-how they were seeking, as has happened in several instances. When that happens, the foreign party most likely has no legal recourse. The New York Times quoted China Law Blog’s own Steve Dickinson on the biggest problem with V.I.E.’s:

“Chinese law has a very clear provision. A contract written to avoid the requirements of Chinese law is void and the court will not enforce it,” said Steve Dickinson, a partner at Harris & Moure and a co-author of the China Law Blog.

So how will Alibaba help? As this Washington Post article, The red flags around Alibaba and one of the biggest stock debuts in history points out, is a rather risky investment because it involves a VIE structure, among other things.

But Alibaba is also huge and very public and that means it is very influential. If Alibaba succeeds as a stock investment, the chances of other Chinese companies having successful IPOs will rise. Conversely, if Alibaba tanks, we can expect Chinese stock IPOs to go into its own tailspin.

We are always saying that the Chinese government favors stability over economics, but oftentimes economics equals stability and we believe that the Chinese government would like to see Alibaba succeed. If China were to deem VIEs illegal and shut some down, investors likely would flee Alibaba stock and that would be bad for China.

The risks of VIEs just decreased.

Categories: Chinese IP

China Employment Law. Watching A Bit Of The Sausage Being Made.

China Law Blog - Fri, 09/19/2014 - 19:36

As the Chinese government starts taking its employment laws more seriously (at least with respect to foreign companies doing business in China), our China employment law work just keeps increasing, as does our blogging on it.  The below is an email from one of our China lawyers (who is doing China employment law about half time these days), with all possible identifiers removed or changed. We are sending a version of this email out a lot these days.

As noted in previous emails, employment law in China has been in a state of transition over the past few years. Though the relevant laws have not changed all that much, the implementation of those laws has changed quite a lot, and it  remains inconsistent throughout the country. Many of the granular issues, like overtime and working hours, are handled on a case-by-base basis by the relevant local labor bureau, which is why it’s so important that we contact them and explain the facts of each situation before moving forward.

Over the past few days we have spoken several times with the [Big China City] labor bureau, and, in particular the _________ District office, which is the office that handles applications and approvals for your WFOE’s employees. We explained your WFOE’s general approach to them, and we got the following clarification from them regarding  _______ District’s current practice regarding alternative working hours systems:

1.  Mr. Zhang’s [not real name] job position and salary make him theoretically eligible for the flexible working hours system. Other sales representatives employed by your WFOE (even those in ______) might also be eligible.

2.  We spoke with the supervisor of the _________ District labor bureau about the particulars of Mr. Zhang’s employment, and he indicated that there was a good chance Mr. Zhang would be approved to work under the flexible hours system.

3.  Your WFOE would need to obtain permission from the _________ District labor bureau BEFORE implementing the flexible working hours system.

4.   To implement the flexible working hours system, your WFOE would have to submit the following:

  • copies of the WFOE’s business license and organization code certificate
  • a list of employees working under the flexible working hours system
  • a summary of the work and rest schedule for such employees.

5.   The _______ labor bureau does not have a formal position on whether (or how) travel time would count as “working hours.” Their position is that the WFOE’s rules and regulations determine this issue, but the company must ensure that each employee’s workload is reasonable. The labor bureau declined to elaborate on the definition of “reasonable,” other than to say that “it is what a normal person could finish in a normal amount of time” and that “any application for the flexible working hours system would have to explain how each employee’s workload was reasonable.” This is pretty typical and we have quite a lot of experience with handling this.

6.   Your WFOE can prepare and submit this application itself or you can authorize one of our China lawyers to do it on your behalf.

7.   Upon receiving an application, the labor bureau will render an initial decision within 5 business days. However, the ______ District  supervisor indicated that much of the time, the bureau will issue a decision on the spot.

8.   The labor bureau will subsequently issue a formal decision. Any approval for the flexible hours working system will indicate the term of the approval, which can be for up to two years.

At this point, I suggest that you think about your approach to travel time and working hours for sales representatives and then we should discuss that. Depending on what you decide, we may want to add a line or two to Article _____ of your Rules and Regulations.

Categories: Chinese IP

The China-US Shuttle. Tain’t No Big Thing.

China Law Blog - Thu, 09/18/2014 - 23:23

Clients (and others) often ask our me how many lawyers we have in China and/or how many China lawyers we have in the United States. I always have problems with those questions for two reasons.  The first reason is that I myself have no firm definition of “China lawyer” and so what I usually say is something like how we have a core group of eight lawyers who spend most of their work hours on China matters, but we also have countless other lawyers in the firm who bring their specialities to bear on our China matters. For instance, we often cover China arbitrations with one of our China lawyers and one of our litigators. Customs matters often involve a China lawyer and a trade lawyer. IP might involve a China lawyer and an IP lawyer. You get it…

But not only does my definition of China lawyer make counting difficult, it is usually not so easy even answering how many lawyers we have in the US and in China because we are always shuttling back and forth. Not to mention that it is the rare week that we don’t have a lawyer in Los Angeles or in Chicago or in New York or somewhere else in the United States. Last week, my answer regarding lawyers in China was five. This week it’s three, as one of our lawyers just returned from three months in China and another from China is here for  a few more days. But soon my answer may well be eight lawyers in China. The point is that it always varies.

We love rotating our lawyers between countries because it is good for our clients, good for the lawyers, and good for our firm. The funny thing is that hardly anyone ever notices. I was in China and Vietnam for a few weeks recently and nobody much even commented. Most communication these days is by cell phone or by email or by Skype or via our firm’s own internal communication tools (Yammer and Lync), and all of these things work relatively seamlessly around the world.

I thought about all of this when I read a Fortune Magazine article by Verne Harnish, entitled Five Reasons to Escape Overseas.  The article extols the following five benefits employees (and in turn their companies) realize by going overseas:

You Get Closer to the Action. Prevents you from slipping into an “isolated worldview” and from missing international opportunities.

You Eliminate Distractions. Takes you away from the day to day demands of the home office.

You Build New Relationships. Its a great way to meet new people. For us, it’s a great way to increase the depth of our firm relationships.

You Uncover Best Practices. Learn from what works elsewhere.

You Beat Burnout. Reinvigoration “from being surrounded by different influences.”

I tend to agree, but what do you think?


Categories: Chinese IP

High-Level China IP Delegation to Discuss IP in China at Fordham Law School this Friday

China Law Blog - Wed, 09/17/2014 - 17:57

A high level China IP delegation will be at Fordham Law School this Friday evening to discuss China IP and China IP legislation. This will be a free event hosted by the Chinese Business Lawyers Association and the Fordham IP Institute. If you want to attend (and you absolutely should) you will need to RSVP at, and specify that you are signing up for the roundtable.

The roundtable discussion is from 4 PM to 5:30 PM at Fordham Law School’s Costantino Room. The PRC delegation, which is studying US laws and implementation regarding IP will include two IP judges from the Supreme People’s Court of the PRC; two members of MOFCOM, including the Deputy Director of US Affairs; a representative from the Legislative Affairs Office of the State Council; the Chief Officer of Legal Affairs at the China Food and Drug Administration; the Chief Officer of the Enforcement Division of the National Copyright Administration of China; representatives from the State Intellectual Property Office and from the State Administration for Industry and Commerce; and so on.  Basically everyone you could possibly want from China.

Attendees will not only have the chance to pose questions at the talk, but may also submit suggested questions to the moderators (through the same email address) ahead of the talk.

There will be a dinner and networking event after the talk from 6 to 8 PM. You can reserve seats for the dinner and networking event, also at Attendees pay the cost of their own meal.


Sounds like a great event.  Any thoughts on what you would like to say or ask to the PRC delegation if you could make it there?  Nothing snarky in the comments, please – and when I say “nothing snarky,” I am, of course, actually inviting you to be as snarky as you like.

Categories: Chinese IP

China Compliance: Don’t Rely On Your China Staff, Part IV

China Law Blog - Wed, 08/27/2014 - 07:44

In Part 1 of this series, I discussed how Chinese staff of foreign companies operating in China typically view China compliance very differently than the foreign company itself. In Part 2, I talked about how the views of Chinese staff can negatively impact the foreign company’s China compliance efforts. In Part 3, I discussed one aspect of what often happens with the local Chinese staff when the foreign company starts to enact real changes in its operations.

Today, I focus in on how Chinese staff will seek to undermine those who it sees as behind the foreign company’s seeking to  implement an anti-corruption and compliance program, and what you as the foreign company must do in the face of this.

In Part 3, we described how employees firs react to a compliance program:

Typically when a foreign company begins establishing strong anti-corruption and compliance polices for its China operations, it will encounter strong resistance from some or all of its Chinese staff. There are multiple reasons for this and the one usually given by staff is the fear that acting within the law will hurt company competitiveness. But there is also usually another reason for resistance — this one unstated — and that is the fear by staff that their kickback gravy train will be ending or, even worse, that their previous kickbacks will be revealed and they will be fired.

It is not uncommon for Chinese employees to view their job as a platform for more than just a salary; it is also a platform for leveraging additional income through kickbacks. This view is even more prevalent among employees of foreign companies, which are viewed as easy marks.

When a foreign company initiates or toughens its China compliance and anti-corruption programs, the local employees cut off from their (usually substantial) additional income stream, commonly get quite angry about this. Usually, they start out by trying to convince the foreign company that it is making a big mistake and that its actions will prevent it from being competitive in China. They also will oftentimes accuse the foreign law firm for not having “any clue about how business is done in China” and demand that it be fired. My firm’s China lawyers have many times faced this.

You absolutely must be prepared for at least some members of your China staff to viciously go after those who seek to bring the China operation in line. You can expect to experience some or all of the following:

  1. The staff involved in kickbacks asserting that someone else insisted that they take the kickbacks.
  2. The angry staff insisting that the entire compliance clean-up operation is being done to take out certain people in the company.
  3. The angry staff insisting that some of those involved in the clean-up operation be fired. In particular, be prepared for attempts to be made to frame those people supporting the clean-up.

All of the above are much more likely to happen against a foreign employee than against a domestic employee. We have seen local staff provide “evidence” of improper expense reports against foreigners, make allegations of sexual harassment against the foreigner(s), and come up with “new discoveries” that the foreigner is no longer eligible for a work visa, just to name a few examples.

As shocking as the above may be to you, what we find even more shocking is how often the foreign company takes the bait either because they truly believe the misinformation they are being fed or simply because they lose the stomach to continue moving forward with the cleanup.

When our China lawyers take on a China compliance/anti-corruption program, they warn our clients about the above (and about a number of other things as well) and stress that if they are not going to follow the program through to completion, it is a mistake even to start. Stopping midway with a compliance program will inflict the pain but fail to provide the benefits. Compliance programs are critical for China, but only if done to completion.

Categories: Chinese IP

China Compliance: Don’t Rely on Your China Staff, Part III

China Law Blog - Tue, 08/26/2014 - 14:46

In Part 1 of this series, I discussed how Chinese staff of foreign companies operating in China typically view China compliance very differently than the foreign company itself. In Part 2, I talked about how the views of Chinese staff can negatively impact the foreign company’s China compliance efforts.

In this post, I am going to discuss one aspect of what often happens with the local Chinese staff when the foreign company starts to enact real changes in its operations.

Typically when a foreign company begins establishing strong anti-corruption and compliance polices for its China operations, it will encounter strong resistance from some or all of its Chinese staff. There are multiple reasons for this and the one usually given by staff is the fear that acting within the law will hurt company competitiveness. But there is also usually another reason for resistance — this one unstated — and that is the fear by staff that their kickback gravy train will be ending or, even worse, that their previous kickbacks will be revealed and they will be fired.

It is not uncommon for Chinese employees to view their job as a platform for more than just a salary; it is also a platform for leveraging additional income through kickbacks. This view is even more prevalent among employees of foreign companies, which are viewed as easy marks.

When a foreign company initiates or toughens its China compliance and anti-corruption programs, the local employees cut off from their (usually substantial) additional income stream, commonly get quite angry about this. Usually, they start out by trying to convince the foreign company that it is making a big mistake and that its actions will prevent it from being competitive in China. They also will oftentimes accuse the foreign law firm for not having “any clue about how business is done in China” and demand that it be fired. My firm’s China lawyers have many times faced this.

It is when the above fails to work that things get really tricky. The disgruntled employee oftentimes starts listing the illegal activities the foreign company has engaged in and then says, “You can’t fire me, because if you do I will report you for ten years of non-compliance.” Half the time, it is this very employee who (deliberately) set you up so as not to comply and then always assured you that you were in full compliance or that your non-compliance would never matter. Much of the time, your non-compliance actually benefitted this employee, like for example if you paid salary off the grid.

How do you handle this situation? The pat answer is by preventing it from happening in the first place. If you have a strong compliance program in place from day one and if you comply with the laws, these threats should have no impact. But that’s the pat answer. The real answer is that it depends. It depends on what your violations are and whether they can be remedied and at what cost and it also depends on what your employee really wants. Almost always the employee wants a top-tier severance package and oftentimes just giving him or her that will be enough to keep them quiet, especially since their going to the government may put them at risk as well.

Categories: Chinese IP

China Trademarks: Like a Box of Chocolates

China Law Blog - Mon, 08/25/2014 - 05:58

Those of us who deal with China trademarks on a regular basis are used to a certain level of weirdness. To be fair, most decisions from the Chinese Trademark Office (CTMO) are logical, apply the appropriate laws and regulations, and occur within the general expected timeframe. But a nontrivial number are simply bizarre, and come with neither warning nor explanation. A trademark might be rejected for a ludicrous supposed conflict, like having the word “the” in common with a previously registered trademark. A trademark might be registered when it should be rejected for being identical to a previously registered trademark. A trademark might sit in limbo for two or three years before it receives an official decision. You never know what you’re going to get. Just like a box of chocolates, if that box was a few weeks past the sell-by date. But even if you get two or three horrendous decisions in a row, you can usually convince yourself it’s bad luck rather than a trend. For this reason, it has taken people a while to realize that something monumentally weird is going on: the CTMO has stopped issuing decisions.

As it turns out, this is an open secret. Or rather, it’s not a secret at all, it’s just not being publicized. In conjunction with the new Trademark Law going into effect on May 1, the CTMO has been switching over to a new computer system. During the transition period, the trademark examiners have (in theory) been working as usual: reviewing applications and rejecting trademarks and approving trademarks and all of the other wonderful things they do. Except they have been doing all of this offline, and until the new computer system is operational, no one outside the CTMO knows exactly what the examiners have been up to or how many hundreds of thousands of decisions await dissemination. Had the transition to the new computer system taken a couple weeks, which was doubtlessly the plan, no one would have been the wiser. But like almost every major IT project in the history of IT projects, the transition is way behind schedule – nearly four months and counting.

The most recent update I heard was that the new computer system would be online by the end of this month at the earliest. Not exactly the boldest of pronouncements. The people at the CTMO cannot be happy with this situation; they busted their tails to get caught up before the new law went into effect and now, just a few months later, are more behind than ever. But the Chinese trademark agents (who handle the vast majority of trademark applications, and are required by law to handle all applications filed by non-Chinese entities) must be even unhappier. They’re the ones that have to pass along the results to their clients.

All of this is particularly ironic given the new Trademark Law’s inclusion of strict deadlines for trademark decisions, which was unabashedly publicized by news reports and law firms alike. But unless you’re Alanis Morissette, irony doesn’t pay the bills.

UPDATE (8-25): The CTMO has just started to issue a few rejections and approvals, but the massive backlog remains.

Categories: Chinese IP

China Compliance: Don’t Rely on Your China Staff, Part II

China Law Blog - Sun, 08/24/2014 - 08:28

In yesterday’s post, we briefly talked about the rash of legal problems lately besetting foreign companies doing business in China and of how foreign companies must avoid the temptation to assume that their Chinese staff have all China legal issues covered.

This post addresses the resistance foreign companies (and their lawyers) often face from Chinese staff when the foreign company seeks to comply with Chinese law. This resistance typically stems from Chinese staff who believe that “Chinese laws are stupid and unrealistic and routinely ignored.” They are of the view that if “we follow all of these laws we will not be able to compete with all of the Chinese companies that do not.”

Here’s the really scary thing: your Chinese staff is often correct and we could cite example after example as to why. How can you compete when your WFOE pays employees for a 40 hour work week yet your Chinese competitors are paying the same for 70 hours of work from their employees? How can your WFOE get the big contract without discretely giving a white envelope (usually in a briefcase) to the decision-maker just like all of your competitors do?

I do not purport to have the answers to these somewhat intractable questions so instead I will quote from what one of our lawyers told a client the other day. This client was told of concerns that we had about the people with whom it was doing business and instructed to retain us to make sure that none of these people were on any sanctions or prohibited entity watch-lists. The client responded by saying that no matter what we might find about the people and the companies, he didn’t see how his company would not go forward with the sale. “It’s three and a half million in sales,” he said. To which our China lawyer in charge of that matter responded by saying, “right, but I really think you need to weigh that against a potential three and a half years in jail. For you. Oh, and you might end up having to spend that time in both a China jail and a U.S. jail because you can be prosecuted by both countries and I’m not sure whether the U.S. will give you any credit for time served over in China.” He retained us to do the search, and fortunately, everyone checked out.

If you are serious about bringing your China business into compliance it will not be pain free or inexpensive. But hey, it beats the alternatives.

Categories: Chinese IP

China Compliance: Don’t Rely On Your China Staff

China Law Blog - Fri, 08/22/2014 - 08:54

You’ve heard the message. If you want to keep operating in China and stay out of legal trouble, the time is now to get your China house in order. And this is quite possible.

But, can you rely on the advice of your China staff to establish corporate and regulatory compliance procedures, as well as anti-corruption policies? The answer is a weak (or is a strong?) maybe. The problem is that far too often your local China staff  views compliance and legal issues far differently than you or a government audit would.

In Dead and alive: metaphors for (dis)obeying the law U.Penn’s language log explains a common Chinese phrase used during reporting on the recent OSI food scandal, and by doing so helps highlights the problem:

规矩是死的,人是活的。… “It conveys a fairly typical Chinese attitude towards any rules/laws/regulations: they are made to break, bend and be compromised. View it [sic] positively, this indicates a way of problem solving. [emphasis added]”

You want your Chinese staff to solve problems, but you must be wary of how they do so, because breaking, bending or compromising rules/laws/regulations does not work for foreign companies doing business in China. Foreign companies with a history of local-style problem solving are low hanging fruit for Chinese government bureaus looking to demonstrate they have the will to enforce their own laws and that they care about the citizenry they are to serve.

Our China lawyers are always getting contacted to help foreign companies after they have gone through the following:

1. Foreign company sees need, and has some will to become compliant with Chinese laws and regulations and to establish a “no bribery policy” and it so instructs its employees.

2. Upon being so instructed, its Chinese employees think that “if we follow all these stupid rules we cannot accomplish anything”

3. The Chinese employees insist that they understand the company’s new “get clean” directive but little to nothing changes. Nonetheless, the foreign company relies on its local Chinese employees, believing that everything is just fine.

4. A government bureau shows up for an audit.

5. The foreign company learns that everything is not fine and that claiming that it was only doing what its Chinese employees insisted was legal and right provides it no relief. In fact, it oftentimes learns that claiming to have done only what some Chinese government bureau itself told them it to do also provides no relief.

6. Now, in the crosshairs, the foreign company realizes they require assistance beyond what their Chinese staff can give. At this point, they call our China lawyers.

Our job at that point is to try to reduce the sanction because it is usually too late to avoid all consequences. Without question, it is easier to get legal before the government knocks at your door. And relying on your local China staff to get legal rarely is going to work. For more on this is the case, check out Your Chinese-American VP Don’t Know Diddley ‘Bout China Law And I Have Friggin Had It.

An important first step to preventing a compliance/corruption problem is establishing a strong anti-corruption policy that zealously works to prevent your company and your entire staff from violating the China’s anti-corruption laws and those of your home country. At minimum, this means you have provided an Anti-Corruption Compliance Manual, written in both Chinese and in English, to all of your staff, and that you regularly conduct staff training to ensure the necessary shift in company culture takes place. This also means that you have objective third parties audit your company for compliance and then you take actions necessitated by that audit report.

And that leads to our next post focusing on compliance, which will discuss further why you need to get compliant now.

Categories: Chinese IP

China Part-Time Employee Rules

China Law Blog - Thu, 08/21/2014 - 19:46

In China, the rules for part-time workers are not nearly as developed as the rules for full-time employees. In fact, it was only a few years did China begin legally recognizing part-time employees. The 1994 Labor Law applied only  to full-time employees and did not even mention part-time employees. In 2008, the revised PRC Labor Contract Law for the first time recognized part-time employees on a statutory level.

Unlike full-time employees, part time employees do not require a written contract. This does not, however, mean that the hiring and retention of a part-time worker is any less complicated than for a full-time employee and for the reasons set forth below, our China lawyers advise our clients to execute written contracts with both their full-time and their part-time employees. One reason to have a written contract with your part-time employees is to ensure that your employee understands the terms of employment and his or her work responsibilities and obligations. A contract makes clear that your employee (be she full or part time) agrees to obey all company rules and regulations. It can be particularly important to get something in writing regarding your company rules for protecting your confidential information, trade secrets and intellectual property.

A written contract also can serve as proof that your part-time employee is indeed a part-time employee. Towards that end, the contract should have a provision clearly stating the part-time nature of the position. At minimum, we typically like to put the following into the labor contracts we draft between our clients and their part-time employees

  • The working hours
  • The term/duration of the employment agreement
  • A description of the work the part-time employee will be performing
  • The part-time employee’s wages
  • Applicable labor protections and labor conditions

Note that you are not allowed to set a probation period for a part-time employee.

Under China’s Labor Contract Law, a part-time employee can work no more than four hours a day and no more than 24 hours in a week. If the part-time employee works more than these hours, you are at risk of “converting” him or her to a full-time employee, with all the legal obligations that go along with that status.

Chinese law requires that you pay your part-time employee wages at least every 15 days. This is different from the rules for full-time employees who are usually paid monthly. As with full-time employees, the salary you pay to your part-time employees must meet the local minimum wage requirement.

Chinese law allows either the employer or the part-time employee to terminate the labor contract at any time, without prior notice. As a general rule, the employer is not required to pay any economic compensation to the employee.

Employers are also normally required to pay only work-related injury insurance for their part-time employee but because every locale in China seems to have different rules on this, we always check first with the relevant authorities to figure out our client’s benefit obligations for part-time employees.

Categories: Chinese IP

How To Get Legal In China. Now.

China Law Blog - Wed, 08/20/2014 - 16:20

During the past year, the number of calls from American (sometimes European) SMEs pushed out of China for having operated there without a legal entity (such as a WFOE) have doubled? What is causing this increase of foreign companies getting shut down in China?It’s the economy, stupid.

As China’s economy tightens, various local governments increase their crackdowns on foreign companies operating illegally. Period. But what also happens is that these foreign companies terminate their relationships with their Chinese personnell and then those ex-personnel report the company for operating illegally.

Generally, there is not much our China lawyers can do for a company that has been pushed out of China, but there is a lot we can do for those companies seeking to go legal. And fortunately, the calls and the emails from those companies have increased as well, no doubt due to what they have heard is happening to their compatriots.

The first thing we as lawyers need to do to help these companies get legal (and fast) in China is to figure out how they are currently operating in China (illegally) and then figure out the best way to get them operating legally.

An email from one of our China lawyers to such a client passed my desk the other day and I thought it would be helpful to reprise it here, with changes made so as to completely camouflage the company to whom it was written:


Please provide more details about your business model, including the following:

I understand that your core business is selling _____ products. How do you sell these products? (On the Internet? In a store?)

To whom do you sell your products? (Direct to the consumer? To a store? Via a distributor?)

Where do you sell your products? (The US only? North America? Europe? Asia? China?)

Do you have goods manufactured solely for your own company, or do you sometimes have goods manufactured on behalf of a third party?

What percentage of your products come from China?

Please provide more details about what you are doing in China, including the following:

  • I understand that you currently purchase from approximately _____ factories in China and import approximately ____ thousand containers per year. Are your purchases spread fairly even across those factories, or do you order a large percentage from a few of them? 
  • Are the factories scattered across China, or are they concentrated in one or a few areas?
  • Do you have factories make customized goods for you, or do you order “off the shelf” goods that the factories already make?
  • Do your products bear your brand/trademark, or the brand/trademark of any third parties?
  • For how long have you been working with these factories? How did you come to choose them?
  • How do you purchase your products from China? Do you purchase them directly or via a middleman/sourcing agent? Do you use contracts? Purchase orders? Are you committed to purchasing minimum quantities of anything?
  • Do you have any plans to add new factories or drop existing factories?
  • Do you have any other plans to change your operations in China during the next 1-3 years?

Please provide more details about your “employees” in China, including the following:

  • I understand that you currently engage ____ people in China to ______. On what basis have you engaged them?
  • For how long have they worked for you?
  • How did you hire them in the first place?
  • Have they signed a contract? A confidentiality agreement? Anything?
  • How do you communicate with them? 
  • How much do you pay them?
  • How often are they paid?
  • In what currency?
  • In what manner (check, wire transfer, cash, etc.)?
  • What arrangements, if any, have you made for payments into these “employees’” social insurance accounts?
  • What are their responsibilities?
  • To whom do they report to?
  • Where in China do they work?
  • Do they have an office? If so, where is it?
  • Have you ever engaged other people in China besides these ______ current people? If so, how did those engagements end?

Please provide more details about your future hiring plans in China, including the following:

  • I understand that you are thinking about engaging ____ additional people in China. When do you anticipate bringing them on?
  • How much will you pay them?
  • What will their responsibilities be?
  • To whom will they report?
  • In what city will they work?

What are your main concerns regarding your operations in China?

  • Compliance with Chinese laws, including labor laws?
  • Developing a market for your products within China?
  • Ensuring product quality and compliance with relevant laws in the markets where you sell?
  • Protecting your IP?
  • Something else?

Once we get answers to the above, along with answers to various follow-up questions, we are ready to start presenting various options, along with their plusses and minuses and their costs.

Categories: Chinese IP

China Contracts and the Unknown Counterparty

China Law Blog - Tue, 08/19/2014 - 05:48

Whenever one of our China lawyers drafts an agreement for a client doing business in China, one of the first things we ask is the identity of the Chinese counterparty. It’s a deceptively simple question.

The typical Chinese manufacturer (for example) is composed of multiple entities, with complicated lines of ownership. One entity may run the factory, another entity may run the office, and a third entity may serve as a holding company – and is probably based in Hong Kong or Taiwan. Overseeing the entire operation is a controlling shareholder who could care less which entity is the contracting party. And every single person on the Chinese side ignores corporate formalities and behaves as if all the entities are interchangeable.

But the entities are not interchangeable, and the counterparty matters. How it matters depends on your goals and the Chinese side’s corporate structure.

One basic rule is that the counterparty should have financial resources. No rational company should sign an agreement with a counterparty that is effectively judgment-proof. But many holding companies, especially those in Taiwan and Hong Kong, conduct no business other than receiving payments, and their bank accounts are emptied every few days.

Another rule is that the counterparty should be the entity that you pay. In the face of a stack of wire transfer receipts and a signed contract, it’s hard to argue that a business relationship doesn’t exist. This rule is considerably less compelling, however, when the Chinese side insists that payments be made to its holding company.

Meanwhile, if you have any hope of stopping IP infringement, the counterparty should be the entity most likely to steal your IP – the factory. But the factory may be an otherwise impractical choice if it has neither financial resources nor English-speaking personnel.

Similarly, you will need to consider dispute resolution, especially if the holding company is a Hong Kong or Taiwan entity. Where do you want to litigate (or arbitrate)? And where do you need to enforce the judgment?

Regardless of the named counterparty, any contract should reflect the reality of your relationship with the Chinese side. If the factory handles manufacturing and shipping, the office handles communication and orders, and the holding company handles all payments, then the contract should make that clear. The ideal situation, of course, would be for one Chinese entity to handle everything. But reality rarely matches the ideal.

Determining what makes sense in your particular situation will require a combination of common sense and due diligence. And, increasingly, common sense when conducting due diligence.

Categories: Chinese IP

Vietnam As China Replacement

China Law Blog - Mon, 08/18/2014 - 05:48

You know how when you buy a particular kind of car you all of a sudden see that particular brand of car everywhere? A similar thing has been happening to our law firm with respect to Vietnam. As soon as we brought on a really experienced Vietnam lawyer, we started seeing Vietnam opportunities just about everywhere:

  • The high end shoe company client that was being threatened with a massive law suit in China by its China supplier for funds allegedly owed that supplier for shoes that our client literally could not sell? Start making the shoes in Vietnam.
  • The clothing company that paid its long-time China supplier right before that supplier shut down and disappeared with all of the money? Transfer manufacturing to Vietnam?
  • The American company whose China work force and China suppliers have combined to raise costs so much that it can no longer make a profit? A move to Vietnam is in order.

But what has recently really put the frosting on Vietnam’s cake has been the increased coziness between the U.S. and Vietnam governments. The New York Times did a story on this, entitled, In China’s Shadow, U.S. Courts Old Foe Vietnam, mostly focusing on the rapidly warming political relations between the two countries. But needless to say, with the warming political relations has come warming economic relations and what that means on the ground is that Vietnam is redoubling (if retripling were a word I would have used it) its efforts to bring in American businesses. I was in Vietnam during the riots against Chinese businesses and the word everywhere was that declining Vietnam-China relations meant that Vietnam would need to buff up its welcome mat for American companies and it has unrelentingly done so pretty much ever since.

Two days ago, in Foreign Executives in China. Worry Me Yes or Worry Me No? we wrote about how American executives that have acted within the law in China need not panic due to what is happening there with the onslaught of anti-corruption and anti-trust claims being brought against foreign companies. But that does not mean that American companies should not be looking at their China businesses holistically and making the tough decisions as to whether to stay or go or maybe just supplement.

For more on Vietnam as a China replacement, check out the following:

Categories: Chinese IP

China’s SaaS Market: WFOEs Need Not Apply

China Law Blog - Sun, 08/17/2014 - 08:41

A major trend in the business software business is provision of software not through installation on a customer’s computer but rather through online access using the Internet. This approach is known as software as a service (SaaS). Though SaaS is a major trend in the U.S. and Europe, SaaS in China by a foreign company or a WFOE is not possible. This poses major issues for foreign software companies seeking to enter the China market.

China recognizes the SaaS method of providing software. However, use of the Internet requires that the provider acquire a commercial ICP license. Since SaaS by definition makes use of the Internet, all SaaS systems in China require the provider obtain a commercial ICP license.

Here is where the problem arises. A WFOE or other foreign owned entity cannot obtain a commercial ICP license in China. There are no exceptions to the rule. Accordingly, if a WFOE or foreign entity wants to offer its software in China though a SaaS system, it must do using an indirect method such as licensing the software to a licensed Chinese entity through a method often called an “Internet portal”.

China’s Ministry of Industry and Telecommunications (MIIT) is in charge of Internet licensing. The MIIT has become even clearer on the SaaS rule as it confronts the growth of software business in China. In particular, its position on foreign software providers has hardened over the past several months as China responds to Snowden’s NSA revelations and the cyber espionage claims of the U.S. against the Chinese military. In the past, many U.S. software providers argued that the commercial registration rule did not apply to their business because no e-commerce was conducted on the SaaS site. Others argued that a Ministry of Commerce exception applied to their SaaS offerings. These arguments have been forcefully rejected by both the Beijing and Shanghai offices of the MIIT and they cannot be relied on for future SaaS business in China by foreign companies.

Accordingly, a WFOE has available the following two methods for selling its software in China:

  • Direct sales to customers. Software is installed on the client server and all data is housed on the client server as well. If the client wants to make the data available to the general public, the client does this on its own Internet site, under its own license. The WFOE would in no way be involved in this process. The WFOE could of course be engaged to manage the entire process, including creating an intranet available only within the client’s premises or as an Internet site available to the general public. The licensing (commercial or non-commercial) for such a public website depends on how the service is constructed.
  • SasS offered through a service/license agreement with a 100% Chinese owned Internet ”portal.” As noted above, provision of software through SaaS cannot be done directly by the WFOE because the provision of SaaS services in China by ANY entity requires a commercial ICP license. That is, if a 100% Chinese owned company wants to provide its software through SaaS, that Chinese entity must obtain a commercial ICP license. Note that it is not relevant what the customer will do with the software. All that is relevant is that 1) the customer is paying for the software and 2) access to the software is delivered through the Internet. Thus, the argument that SaaS software is not commercial because no e-commerce is done on the providing website fails. If the WFOE is paid for the software the whole transaction is commercial and it is therefore subject to the commercial ICP license requirement that applies to all SaaS activities in China.

To use a SaaS approach, the WFOE will be required to offer the software through a Chinese owned company that owns a commercial ICP license. Such an entity is referred to as an Internet portal. Under an agreement with a portal, the WFOE would contractually engage the portal to offer the SaaS software package, using the portal’s license as the applicable commercial ICP license. Because the portal approach is new in China, there is currently no standard portal agreement or portal structure.

Though the portal approach is a new concept, the MIIT officials in both Beijing and Shanghai have in just the last few months told our attorneys on multiple occasions and without hesitation the following:

  • SaaS CANNOT be done directly by a WFOE. There are NO exceptions.
  • Indirect provision of foreign software services through a portal arrangement is acceptable because the portal entity will be entirely responsible for complying with Chinese law. All MIIT offices we have contacted have affirmatively recommended the portal approach without any prompting from us.

To summarize: there are two ways a WFOE can sell software in China: Direct sales through the WFOE or indirect sales through an Internet portal. There is no intermediate method that allows for direct sales using the SaaS approach.

Many of our clients are contacted by ISPs, cloud service providers and related entities in China who claim to offer just such an intermediate method. Such offers should be viewed with caution. In our experience, these offers are coming from two kinds of companies: 1) companies that do not understand the law and 2) companies whose business model is built around evading/violating the law. Given China’s current legal environment regarding foreign companies, it makes little sense to operate in a way that claims to exploit a loophole or grey area.

Categories: Chinese IP
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