Chinese IP

Three Keys to Spotting a Fraudulent Chinese Company

China Law Blog - 10 hours 47 min ago

Use our three factor test for China company investing and you will avoid becoming a stooge.

I often receive calls from U.S. investors in Chinese companies listed on the U.S. stock exchanges. The investors are concerned with questions about the value of their investment and they want me to assist them in analyzing the legal status of the Chinese entity. My response is that the first step is to determine whether or not the Chinese entity is an empty shell. If the Chinese entity is an empty shell, then there is no value in China to protect and further analysis of the company is a waste of time.

I have done this research so many times that I have developed a three step test to determine whether a Chinese company is a fraud. I take a look at the annual or quarterly report of the Chinese company and if it meets these three tests, it is virtually certain to be a complete fraud, with no operations, no assets and no funds in the bank.

The three indicia of fraud are as follows:

1. The company has a large amount of cash in the bank. I often see supposed cash holdings greater than 50% of the company’s annual gross revenues. Interest rates at Chinese banks is very low and legitimate Chinese companies do not usually keeps large amounts of their cash in interest bearing bank accounts. Usually the supposed large cash account is accompanied by bogus explanations explaining why the Chinese entity is unable to repatriate the funds to its investors as dividends. Later investigation usually reveals that these funds were never actually deposited in the bank. That is, these large deposit accounts are simply falsified. The odd thing is that auditors will normally verify that the accounts are real. Once the fraud has been exposed, I have asked auditors what they did to verify the account. They usually state that they relied on reports from the management of the company. In China, the only way to verify the authenticity of a bank account is to arrive at the bank unannounced and look at the computer screen while standing BEHIND the counter as the clerk makes an unplanned query. Virtually no bank in China will allow this, which means that audit verifications of Chinese bank accounts are typically of no value.

2. The company reports profit margins in excess of 30%. I often see fake companies report profit margins of 50%. China is a very difficult country in which to do business and I have never seen a legitimate Chinese company with profit margins even approaching this level, not even state owned monopoly companies. It is certain that Chinese companies located in rural Fujian, Shaansi or Heilongjiang do not generate margins at this level. These high margins are then the explanation for why the company has so much free cash; they are so profitable they are printing money. The claim is that they have some unique product or some technical monopoly. In my experience, these claims are never true, as just a few minutes of careful thought would reveal.

3. The company is formed as a VIE (variable interest entity) when it is operating in a business sector where foreign investment is not restricted and the VIE structure is not required. A VIE is required only when a foreign invested company intends to operate in a restricted sector such as the Internet. This is why Baidu, Sina, and AliBaba are organized as VIEs. But most Chinese business sectors are open to foreign investment. When a company that operates in manufacturing or retail sales chooses to organize as a VIE, there is typically only one reason: the organizers are planning to commit fraud against the foreign investors.

Anyone can perform this three factor analysis of a U.S listed Chinese company in about 30 minutes and ten minutes is usually enough.

Unfortunately, our China lawyers are usually contacted by investors long after this analysis should have been conducted. We are usually called on when the investors begin realizing that something is wrong and the Chinese company has ceased even to pretend and is now no longer returning investor calls. Don’t let this happen to you. If a Chinese company fails to meet the above three factor test, your answer is clear: don’t invest.

The post Three Keys to Spotting a Fraudulent Chinese Company appeared first on China Law Blog.

Categories: Chinese IP

China Litigation and Arbitration, Part 3: China Consultants and the Liabilities THEY Face

China Law Blog - Mon, 02/01/2016 - 10:04

Don’t gamble on China legal advice

Our China lawyers often work with many really experienced and really good China consultants. These consultants are usually really good for the following reasons:

  • They know the ins and outs of what it takes to succeed in doing business in China and with China.
  • They know the ins and outs of how to find good Chinese companies for whatever transaction it is their clients are seeking to do in China because they know how to distinguish between a good company and a bad Chinese company.
  • They know the ins and outs of how to negotiate with Chinese companies.
  • They know when to bring in a China lawyer to assist.

Of course I had to add that last one, but the truth is that just about every China sourcing consultant I know has violated this last one a few times. And — no surprise — it is on this last one of which I am writing.

China consultants too often fall short in the legal aspects of their own business. They have been “doing China” for so long that they seem to lose sight of the fact that when push comes to shove (or as lawyers like to say, when a deep and easy pocket needs to be found) they are the American/British/Canadian/Australian company that may need to answer for what happened. If you are a Western consultant hired by a Western company to assist it in doing any sort of business in or with China, you need to understand that if something goes wrong for your client you will be your client’s first choice for legal redress. Not only is there a good chance that you have the deeper pocket (or at least the easier pocket to reach into) but you will almost certainly be easier to sue for the simple reason that you are likely going to be almost right next door, not on the other side of the earth.

What can go wrong for China consultants that can lead to their incurring liability? And what can you as a China Consultant do to prevent or ameliorate such a problem? Our first advice whenever a company comes to us with concerns about protecting against future liabilities is to engage in corporate structuring to protect company and personal assets. This is an absolutely necessary first step. Looking at securing insurance protections is oftentimes a good second step. Beyond that however, and more specifically to China, you can do a lot to protect your client and thereby protect yourself. See yesterday’s post, China Arbitration and Litigation, Part 2: First Check Your Insurance Policy, on how insurance can be relevant in China litigation and arbitration matters even in situations where you would not expect it to be.

We have lately been seeing a rash of problems with sourcing consultants that assist in finding Chinese manufacturers and this post will focus on those consultants, leaving to future posts the issues our China attorneys are seeing with other sorts of China consultants.

A typical China product sourcing project, might go down as follows:

  1. Western company retains a product sourcing consultant to find the best Chinese widget manufacturer, based on cost, quality, and dependability.
  2. The product sourcing consultant requests and secures a sample widget from a number of Chinese manufacturers, many of which it may have conducted business previously.
  3. The consultant meets with countless Chinese manufacturers in search of the best one.
  4. The consultant recommends company Z in China to manufacture 200 million widgets.
  5. The consultant is to be paid a percentage of the manufacturing costs, oftentimes with that percentage set to decline over time.
  6. Company Z starts manufacturing the widgets.

Now let’s deconstruct this hypothetical project above and note where the consultant has potentially harmed the client and needlessly taken on huge liabilities.

The China consultant agreed to find “the best Chinese widget manufacturer.” Is that the best widget manufacturer in China or the best in the world? What if one Chinese widget manufacturer charges one hundred dollars per widget for 200 million widgets, but your client’s competitor finds another widget manufacturer who will do it for ninety dollars. Is the China consultant liable for the ten dollar difference? Even worse, what if a competitor of the China consultant’s client gets the same Chinese widget manufacturer to manufacture its widgets for ten dollars less? Will a U.S. jury believe the China consultant was doing its best on pricing when its fee ended up being larger because the Chinese manufacturer was able to charge more? Is the China consultant responsible for the Chinese manufacturer’s late deliveries? Is the China consultant responsible for the Chinese manufacturer’s bad product? Whose fault is it if 100 people are badly injured due to the widgets being defective? Is it clear exactly on what the China consultant’s percentage is based? Is there anything to prevent the China consultant’s client from entering into a new deal with the China manufacturer the China consultant found and negotiated the manufacturing arrangement?

If you take a product sample to China and start showing it to potential manufacturers without having FIRST put various intellectual property safeguards in place, you are courting disaster. Your sample could be used for counterfeiting and the trademark on the sample (or your client’s name) could also be stolen. In November, I wrote an article for Forbes Magazine, Why Your NDA Does Not Work For China, explaining why a Western-style NDA is usually worthless in these situations. That article alone got me two calls from panicking China consultants in a panic asking whether they could be held liable if their client’s lose their IP to China. My answer was that would likely depend on the contract they have with their clients and the role they play for their clients. The long silences I got in response to this led me to believe that neither had anything in writing with their clients and that both had touted their companies as a complete China solution for their clients.

And that right there is the big trap into which China consultants too often fall. In trying to secure clients they encourage their clients to believe that they are experts on everything China and that is what often can come back to bite them.

Just last week I received emails from two different China consultants regarding extremely complicated and potentially major intellectual property issues faced by their clients. In both cases, I explained very generally the issues their clients would likely be facing and in both cases the consultant wrote me back to tell me how they would be handling the situation in the short term. And in both cases the consultant’s planned advice would not have been appropriate. So I wrote back something like the following:

This is incredibly complicated and what you just said below is not good advice at all. My advice to you would be to stay completely away from ALL of the legal issues and let your client deal with all of these issues itself. They should not expect you to be giving any legal advice and your doing so just increases the odds of your being blamed when things go wrong and of being sued and losing on the same grounds.

And that is the point. As a consultant it rarely behooves you to get in the middle of your client’s complicated China legal issues and they should not expect that of you. Even if you as their China consultant caused your client’s complicated China legal issues, your trying to solve them will more often than not simply compound them.

So what is the solution for China consultants? A written contract between your consulting company and your client before you start work. This contract should make clear exactly what it is that your consulting company will be doing and that these enumerated items will be its only responsibilities.

The problem we consistently see, however, is that product sourcing consultants usually oversee their clients’ OEM agreements with the Chinese manufacturers and by doing so, they subject themselves to major liability issues if that contract is not up to snuff — and it virtually never is.

If your company is selling itself as the “China people” or the “China experts” and your clients are counting on your company to guide it through China’s business minefields, then your company will be expected to know anything and everything about what it takes to do business in China. And if something goes wrong in China, a Western court will likely expect you as the China expert to have been the one to have known better. For example, if your client loses its IP in China because it believed that its US or Canada or Australian or EU patents and trademarks extended to China (they don’t), you as their China consultant may find yourself on the hook for not having warned them otherwise.

Bottom Line: At minimum, China consultants should put in writing with their clients that they do not provide legal advice and that their clients should retain their own lawyers for that. And that stick by that and refuse to provide any such advice.

China consultant, protect thyself.

The post China Litigation and Arbitration, Part 3: China Consultants and the Liabilities THEY Face appeared first on China Law Blog.

Categories: Chinese IP

China Arbitration and Litigation, Part 2: First Check Your Insurance Policy

China Law Blog - Sun, 01/31/2016 - 09:31

Facing international litigation or arbitration? Check your insurance policy.  (http://bit.ly/1MbAr8b)

If I were to list out the most common litigation-inducing problems our China lawyers have seen in the last few years, that list would consist of the following:

  1. Bad product received from a China manufacturer
  2. Late product received from a China manufacturer
  3. No product received from a China manufacturer
  4. An investment into a China company or project that never existed
  5. The China Bank switch scam
  6. IP theft (trademark, copyright, patent or trade secret)
  7. Failure to get paid by a Chinese company
  8. The reverse of some of the above. In other words the American/European/Australian company is being accused of having provided bad product, failing to pay, or having engaged in fraud or IP theft.

Because litigating and arbitrating against Chinese companies is rife with so many issues specific to China and to Chinese companies, we have begun an indefinite series on China Litigation and Arbitration. If you have any questions regarding litigating or arbitrating against Chinese companies, please leave them as a comment below or please email us and we will try to incorporate answers in future posts within this dispute resolution series. Part 1 of this series, China Litigation and Arbitration: What we are seeing, provides a very general overview of current trends in China litigation and China arbitration.

The first thing my firm’s international litigators usually do when they get an international litigation or international arbitration matter involving one of the above (or really any international arbitration or international litigation matter) is ask for a copy of our client’s insurance policies. After reviewing the policies, we typically predict one of following three results, fairly evenly spread out:

  1. The insurance company(s) likely will pay our client the full amount of coverage (or close to it) without much dispute.
  2. The insurance company(s) may or may not pay our client the full amount of coverage without much dispute, but if there is a dispute, it will likely be worth our client fighting over coverage because it is likely to secure full coverage or at least enough to warrant the fight.
  3. The insurance company(s) is not likely to provide any coverage (beyond maybe a very minimal amount) and it probably will not be worth it to our client to spend much money or time litigating the insurance coverage.

But here is the important thing: the insurance policies we see are all over the map on just about everything.

By way of one example, many policies have almost afterthought provisions on cyberfraud or computer hacking. The main part of the insurance policy may clearly provide that there will be no coverage for fraud, and yet there will be a provision stating that the policy will cover “computer fraud” up to x dollars per incident. The x dollars is overtimes a very small amount, but because the law is unclear both as to what constitutes “computer fraud” and as to what constitutes an incident, we have used this provision to drive a truck through on behalf of companies we represent on China bank switch scam cases. We argue that because the fraud was induced via a hacked email, it comes within the coverage exceptions provided for either (or both) cyberfraud and computer hacking. We then argue that each payment made by our client (and oftentimes in these fake bank frauds there have been multiple payments) constitutes a separate incident. Let’s just say that insurance companies usually prefer settling to litigating a case that might establish new and unfavorable law on one of their own policies. This is especially true in the more friendly policyholder states.

I wrote on this previously in Cheated By China. Check Your Insurance:

This insurance coverage lawyer told me that he is building up a cottage industry representing companies that have been hit with this scam. He said that he alone has taken on about a half dozen of these matters in just the last six months. And if he has taken on about a half dozen of these, that almost certainly means that he has reviewed about a dozen. What he is doing is going to the insurance company of the company that has been scammed and demanding it reimburse his client for the money his client lost. This lawyer tells me that the insurance company’s initial reaction is to essentially call his client an idiot, but as I pointed out, even if true (and I vehemently deny that it is), I have yet to see an insurance policy with an “idiot exclusion.” This lawyer then convinces the insurance company that what happened is plain and simple employee negligence and that the insurance company must provide coverage.

The same can hold true for companies that order a product from China that never comes. There is a an argument to be made that this is fraud and that this is theft and since many policies provide some coverage for fraud and many provide a lot of coverage for theft, it usually behooves us to make an insurance claim on behalf of those companies that ordered product from China and never got anything but a runaround. The same holds true for companies that send product to China or provide a service for a Chinese company and never get paid. They can argue that they are victims of a fraud or a theft. These are not simple arguments, however, as they usually involve inherently inconsistent provisions within the insurance policy contract. An insurance policy may provide coverage for theft on the one hand while excluding breach of contract damages on the other.

Some general business insurance policies — typically called a Commercial General Liability (CGL) insurance policy — may provide a little (or even sometimes a lot) of coverage if your intellectual property (be it your trademark, your patent, your copyright or even your trade secret) gets stolen in China or anywhere else. Beyond that some companies purchase IP protection policies that provide specific protection against IP theft. More common is to have advertising coverage in your standard business insurance policy that will oftentimes provide you with insurance coverage in a dispute involving allegations that you are using someone else’s intellectual property.

Bottom Line: Massive books have been written on insurance coverage. Indeed, massive books have been written on insurance coverage for specific losses like fraud or intellectual property theft. So there is no way a blog post can do anything but touch on the issues. And that is the point of this post. Just to put into your head that you have been paying insurance premiums for years just so that it will be there when you suffer a loss or get sued. So next time you are looking at litigating or arbitrating against a Chinese company or your company is facing a lawsuit or an arbitration for something it is alleged to have done in China or involving China, have your lawyer check your insurance policy for coverage. Because unless you have that done, you just never know.

The post China Arbitration and Litigation, Part 2: First Check Your Insurance Policy appeared first on China Law Blog.

Categories: Chinese IP

China Litigation and Arbitration: What we are seeing

China Law Blog - Sat, 01/30/2016 - 08:39

But sometimes litigating/arbitrating IS your best option.

Had a nice conversation yesterday with a bunch of my firm’s China lawyers and litigators, mostly on what is causing the increase in litigation and arbitration against Chinese companies and about some of the pitfalls peculiar to suing Chinese companies. The impetus for this discussion was my having signed on to speak (twice) about how to avoid litigation against Chinese and how to deal with litigation and arbitration against Chinese companies if it occurs.

Because litigating and arbitrating against Chinese companies is rife with so many issues specific to China and to Chinese companies, I am going to make this the first post in an indefinite series on China Litigation and Arbitration. If you have any questions regarding litigating or arbitrating against Chinese companies, please leave them as a comment below or please email us and we will try to incorporate answers in future posts within this dispute resolution series.

My first litigation related talk is going to be at the Los Angeles Athletic Club (in Los Angeles) on February 25 at 3:15 and though entitled, Manufacturing in China/Asia: Keep Your Eyes Wide Open, its focus is going to be almost exclusively on preventing and handling litigation with Chinese companies. Its “official” bullet points are as follows:

  • How to source products from China and other emerging Asian economies
  • How to source products so as to avoid product liability lawsuits
  • How to prevail in litigation against your Asian manufacturer
  • Cross-claiming against your Asian manufacturer

Immediately following my speech I will be participating on a stellar panel discussing “Claims and Coverage Involving Foreign Products.” For more information regarding this seminar, go here. And to secure a really good discount to this event, please contact me at my firm directly. My next China litigation talk will be in Chicago in May and I will provide more information on that shortly.

In the meantime though, back to why we are seeing such a rapid increase in litigation and arbitration involving Chinese companies. Why is this occurring? We see two obvious reasons for this increase. First, the mere fact that the relationship between so many US and Chinese companies has become more mature. Ten years ago, Chinese companies didn’t want to rock the boat by suing American and European companies and American and European companies believed (generally rightly) that many of their Chinese counterparts did not have sufficient assets to pay any judgment anyway. On top of this, the contracts between the Chinese companies and their Western counterparts were so often so poorly drafted as to make prevailing on a lawsuit a crapshoot.

In the last few years, however, as both Western and Chinese companies want good international contracts to protect themselves, the risks of litigating (though always present) have declined. On top of this, many Chinese companies have become more financially stable and some of them now even have assets outside China.

The second reason for the recent uptick in litigation and arbitration involving Chinese companies is the economic downturn in China. Companies that are making money hand over fist on their core business often view litigating or arbitrating as a time-sucking nuisance that can impede their growth trajectory. But companies with economic problems are often more open to pursuing new ways (like litigation and arbitration) to acquire funds.

The post China Litigation and Arbitration: What we are seeing appeared first on China Law Blog.

Categories: Chinese IP

Quick Question Friday, China Law Answers, Part XII

China Law Blog - Fri, 01/29/2016 - 07:13

How can I get my money out of China without paying taxes on it?

Because of this blog, our China lawyers get a fairly steady stream of China law questions from readers, mostly via emails but occasionally via blog comments or phone calls as well. If we were to conduct research on all the questions we get asked and then comprehensively answer them, we would become overwhelmed. So what we usually do is provide a super fast general answer and, when it is easy to do so, a link or two to a blog post that provides some additional guidance. We figure we might as well post some of these on here as well. On Fridays, like today.

The following question tends to come to us by phone and is never from our existing clients:

Question: I have _____ dollars of cash in my apartment in China. Can you tell me how to get it to the United States/Canada/Australia/Europe without having to pay taxes on it?

Answer: No.

Come on. Did you really think that a lawyer is going to engage in criminal tax fraud with you. What is amazing about these callers is that at least half the time after one of our China lawyers makes clear that we are not going to help them, they tell us of their plan and ask what we think of it. Our response is that is illegal and you could end up in jail either in China or in the country in which you live (for bringing money into a country multiple times to try to get around the incoming country’s money reporting laws)  if you try that.

Usually their plan consists of taking the money back to their home country in chunks just small enough to avoid the money reporting laws of their home country. Sometimes the plan involves taking the money to Hong Kong. Sometimes it involves giving the money to someone shady to take it out for them and put it in a bank account in some other country and sometimes (but we also get plenty of calls from people wanting to sue when the courier keeps all of the money) the courier actually returns some small portion of the money.

Our advice: pay your taxes as you go along and then taking out your money out of China ought to be relatively easy, at least until recently. See Getting Money Out of China: What The Heck is Happening?

 

The post Quick Question Friday, China Law Answers, Part XII appeared first on China Law Blog.

Categories: Chinese IP

Copyright Takedowns in China, Part IV: Whatever you do, register your copyrights first

China Law Blog - Thu, 01/28/2016 - 07:31

This definitely holds true for China copyright takedowns.

 

This is the fourth in a series about online copyright takedowns. Copyright Takedowns in China was a general summary of the regulations that establish the takedown procedures. These regulations enable enforcement of the “right of communication through an information network” as it applies to sound recordings and audiovisual recordings. Copyright Takedowns in China Part II: Searching, Linking or Storing? looked at how providers of storage space encounter more liabilities than those merely providing searching or linking services. The application of the takedown regulations to cloud service providers was covered in Copyright Takedowns in China Part III: Audiovisual and Sound Recordings in the Cloud.

Our China lawyers are handling more and more takedown work these days and one thing is very clear: if you ever expect to have infringing content taken down the single most important thing you should do is register your copyright in China in advance. The reason for this is simple. If you attempt to invoke China’s notice and takedown system the internet service provider will put you to proof. If you don’t have a Chinese copyright registration certificate ready to go you will need to prove your copyright ownership. Though Chinese network service providers all have their own requirements for this, all of them will require you to provide a bunch of chain of title documents that have been translated into Chinese. These documents will be essentially the same as those required to obtain a registration anyway. Once you have proven your ownership to a network service provider, you will have nothing to show for all the work, except, we would hope, the taking down of the infringing content in one instance. You will need to repeat the exercise again and again if numerous sites are involved or if your content goes back up again on a site from which it was taken down.

So speed up the takedown process, and have something to show for your work, by registering your copyrights in China. If you have your chain of title ducks in a row it will be quick and inexpensive to get a registration. You will then be ready to strike.

The post Copyright Takedowns in China, Part IV: Whatever you do, register your copyrights first appeared first on China Law Blog.

Categories: Chinese IP

China Law Blog Commenting Policies

China Law Blog - Wed, 01/27/2016 - 11:00

            Rule No. 1. Nothing is written in stone.

Not sure why, but we have gotten a rash of questions lately from readers wanting to know our policy on comments. Let me start by saying that we do not really have a formal policy and that much depends on who is monitoring the comments on any particular day. I guess if I had to sum it up, we strive not to be arbitrary and capricious.

But if we were to be forced to analyze our commenting policies in writing, I suspect it would look a lot like the below (in parts borrowed heavily from multiple other sites):

We strongly encourage you to comment on our posts as we very much want to be an open forum for discussion and debate. We do expect you to keep the discussion civil and we generally do enforce the following basic rules.

  1. No hate speech.
  2. No selling anything.
  3. No spam. 99 times out of 100, if you give a “selling link” we will delete it even if we keep the rest of your comment.
  4. No slamming anyone by name unless for something someone said. In other words, if you say that so and so owes you $50,000 and is a deadbeat, we delete it. If you say that such and such Chinese company gave you bad product, we delete that. We just don’t think it fair to allow one side in a dispute to provide their facts on our blog.
  5. There are a few people we find so terminally obnoxious or dishonest that we have banned them permanently for this reason and when they post comments under fake names (yes we can usually tell) we delete those also, oftentimes just because we feel like it.
  6. We sometimes (and trust us when we say we hate this) will “modify” or even delete a comment if we believe it could lead us being taken down in a particular country (one guess) that does that from time to time with websites it does not like. This is very rarely done, but sadly, it is every once in a while necessary. Our view is that it is more important to keep that channel open than to have it be closed and we have heard from a large number of people, especially Chinese lawyers who have expressed this same opinion about our blog to us.

We never delete a comment just because we disagree with it or do not like it. Dissenting opinions are not only welcome, they are very much appreciated as they enliven the discussion. It pains us at times to post comments when we know the advice given in them is wrong, but we post those as well, both here and on our China Law Blog Linkedin Group (please consider joining as it’s great!). We long ago decided that our readers are adults capable of making their own decisions.

As you have no doubt noticed, we utilize Disqus for our commenting system and we do this for the following reasons:

  1. It just works. It makes discussions easy to follow and to share.
  2. It puts Disqus in charge of maintaining user information.
  3. Disqus has a good spam filter.

We hold ALL comments for moderation and so there is no need for you to post your comments twice (or eight times either) and unless it has been longer than 24 hours since you posted your comment, there is also no need for you to write us accusing us of having censored your comment. We review all comments before they go live and we generally do this only 1-3 times per day. the comments two or three times per day. What this means is your comment might sit for a couple hours before I can review it. Your patience is appreciated.

We seldom comment ourselves or respond to individual comments simply because we don’t have the time. We also think it best to let our readers control the discussion.

Above all else, please always feel free to contact us with any concerns or suggestions.

The post China Law Blog Commenting Policies appeared first on China Law Blog.

Categories: Chinese IP

China Employment Laws: Dealing With Pregnant and Nursing Employees

China Law Blog - Tue, 01/26/2016 - 05:58

 

Now that China has amended its Law on Population and Family Planning, it is a good time to review how China’s employment laws treat pregnant and nursing employees. As I wrote previously, Chinese labor law generally takes a pro-employee position regarding such employees.

The first thing you as an employer in China must keep in mind when dealing with a pregnant or nursing employee is that you are prohibited from unilaterally such an employee without cause. This means you cannot terminate the employee by giving thirty days written notice or by paying an additional one month of the employee’s salary even if you could ordinarily have done so under the permissible grounds for unilateral termination, nor can you terminate the labor contract of the employee by initiating a mass layoff.

This, however, does not mean you are absolutely prohibited from terminating a pregnant or nursing employee. Termination is still possible under one of the following circumstances:

  • The employee does not satisfy the conditions for employment during the probation period.
  • The employee materially breaches the employer’s rules and regulations.
  • The employee commits a serious dereliction of duty or practices graft, causing substantial damage to the employer.
  • The employee has established an employment relationship with another employer that materially impacts completion of her tasks with her existing employer, or she refuses to terminate her employment relationship with the other employer after being required to do so by her existing employer.
  • The employee uses deception or coercion, or takes advantage of the employer’s difficulties, to cause the employer to conclude the labor contract, or to make an amendment thereto, that is contrary to the employer’s true intent.
  • The employee has criminal liability imposed against her.

In addition to the above, the employer may also terminate the labor contract by reaching a settlement agreement with the employee. It could get messy if the employee claimed she did not know about her pregnancy until after her labor contract was terminated. The employee might go back to the employer seeking to revoke her earlier decision because it was made due to a “serious misunderstanding.” Unfortunately, for China employers, the court decisions on this issue are contradictory, with some holding against employers (and reinstating the employee’s positions) and some holding in favor of them.

Moreover, Chinese employment law requires that when the term of a labor contract with an employee expires while the employee is pregnant, the contract must be extended until the employee is done nursing. Consider this question: what if a pregnant or nursing employees refuses to enter into a new written contract after her existing one has expired? Can the employer end its relationship with that employee?  The answer is somewhat unclear. Some Chinese courts have held that an employer that acted in good faith and the employee refused to sign the contract without justification, the employer has the right to end the labor relationship. But a second view insists on strictly applying the Labor Contract Law and requiring the labor contract be extended even if the pregnant or nursing employee refuses to execute a written labor contract with the employer. The employer should proceed with caution, because letting an employee continue working after the initial labor contract expires may lead to employer penalty (for not having a written labor contract with the employee).

Bottom line: If you are an employer in China, start studying China’s laws on pregnant and nursing employees so that you know them before you need them.

The post China Employment Laws: Dealing With Pregnant and Nursing Employees appeared first on China Law Blog.

Categories: Chinese IP

Chops For China, Sorry But No

China Law Blog - Mon, 01/25/2016 - 07:31

 

Don’t ask a lawyer to shut your barn door after all the animals have left.

 

One of our China lawyers attended a Continuing Legal Education Seminar (CLE) last week to pick up needed credits before the bar fines start setting in. The seminar was on Law Firm Management for the 21st Century (or something like that) and one of the things discussed there was how it is our job as lawyers to discern what it is our clients actually need and then instruct them on that. In other words, clients oftentimes think they need A when in reality they need B.

This is all so true. And in deleting old emails this past weekend, I came across countless examples where this was the case, but my favorite ones are always those where someone writes us (and I apologize in advance for making this post so heavy with bad analogies but I’m in the Midwest United States right now and that just always seems to get me in an analogy mood) very calmly and knowingly asking us for a band-aid without realizing that they have already lost both arms and legs.

The below is a composite of a couple of those, with the email from the potential client and my dream response:

We’re an Australian company and we’ve just been asked by a vendor in China to provide our chop to be added to our contract. Is this something you can help us acquire?

Thanks

My responses (modified slightly for blog purposes) were essentially as follows:

Sorry but no and the reason for saying no is somewhat complicated, but I feel compelled to explain.

Asking us as a law firm for help in getting a chop is the equivalent of giving us a twenty-page contract and asking us to sign it without looking at it. If we sign it (or give you the chop) our law firm is tied in with the contract and no law firm would permit that. No exaggeration, but nearly all of the contracts we see between American companies and Chinese companies do not protect the American company at all. This is because these contracts were either drafted by the Chinese side, which knows exactly how to draft a contracts that leave their US counter-parties out in the cold, or by an American lawyer unfamiliar with Chinese law. For just one example of where domestic lawyers so often go badly wrong on these contracts, check out number two in this post on China mistakes to avoid.

If you want a non-legal analogy, think shutting the barn door after all of the animals have left.

I gave a quick look at your website and I see that you provide services. This is a particularly risky arena for us because service companies are constantly not getting paid by the Chinese companies for which they perform the service, either because the Chinese company chooses not to pay or because (and this is happening constantly these days) the Bank of China itself chooses not to pay. For more on both of these things, I urge you to read the following:

Without knowing what you have done so far, I cannot give you any specific advice beyond that you take real stock of where you are right now as compared to where you should be.

Bottom Line: Don’t wait until the last minute to reach out to a lawyer for help.

 

The post Chops For China, Sorry But No appeared first on China Law Blog.

Categories: Chinese IP

China Tax Audits: The Day The Music Died

China Law Blog - Sun, 01/24/2016 - 07:34

Come gather ’round people
Wherever you roam
And admit that the waters
Around you have grown
And accept it that soon
You’ll be drenched to the bone
If your time to you is worth savin’
Then you better start swimmin’
or you’ll sink like a stone
For the times they are a-changin’

Things are changing for foreign companies doing business in China.

A lot.

Take taxes. Yes, we are always writing about how China has begun cracking down on foreign companies that have China-based employees without a China company (see this Forbes Magazine article, China’s Tax Authorities Want You) and also how China has caught the transfer pricing bug (see this Forbes Magazine article, China’s Tax Authorities Want You, Part 2). But what I am talking about below is different than these two things.

Very different.

Please forgive me for having to be less than direct in this post but those who are familiar with China’s Internet, more particularly, with how it can sometimes be difficult to stay “on the air” on China’s Internet ought to fully understand.

What has been happening of late is really interesting and until I spoke with a leading China reporter who is doing a story on something similar, I did not understand what was happening. I will explain by first telling you what exactly it is that we have been seeing.

Over the last ten years our China lawyers have received probably tens of thousands of calls and emails from foreign companies (mostly North American, European and Australian) companies doing business in China. During these ten years, we have seen many changes in China, some of which come and go and then return again. The closing down of foreign businesses in China for not having a WFOE is one of those (btw, this one is back with a vengeance and we will be writing on that very shortly). But this one is brand new for us I am pretty sure. This one is something we have received five calls on in the last three months or so and I do not recall us ever having received such a call in the previous ten years. Here is the situation prompting the call:

Foreign company operating “legally” in China, or at least legally to the extent that it has a WFOE there, calls us because it is in the midst of a China tax audit. Now to set the stage here, we are a law firm that focuses on helping foreign companies navigate Chinese legal issues; we are not an accounting firm. So when we get China tax calls, they are usually not for help with the basics, but rather when someone realizes that they are in serious legal trouble in China arising usually from a Chinese government accusation regarding a failure to pay taxes. Here is a composite of the recent calls we have been getting:

I am at home in [fill in the blank here with an English language speaking country] and I am not sure whether to go back to China. My company is in the middle of being audited and we are being questioned regarding fake Fapiao. My accountant convinced me that everyone in China uses fake Fapiao and I went along with this. What should I do.

Now a bit more stage setting. In every single instance of the above (but one), the company calling us has never spoken with anyone in our law firm previously, much less retained us as their China attorneys. No, they are calling us totally out of the blue. IN the one case where we spoke previously, I had in my notes that this person “chose not to use us because I made very clear we would not be willing to cut legal corners.” Now to be fair to the recent callers, about half said that they didn’t know that their WFOE had been using fake Fapiaos. And to be fair to the “accountants” mentioned in the call, my pressing in every case revealed that what the callers were talking about was someone more on the level of a bookkeeper in their own company.

Let’s talk for a minute about fake Fapiaos. At their most basic, a Fapiao is an official receipt that allows a Chinese company, such as a WFOE, to take a deduction for an expense. Fake Fapiaos are rampant in China and it is true that a number of companies use them to reduce the amount they need to pay in China taxes. The below comment (left on our blog post, On Being a China Lawyer and on Doing Business in China) describes the prevalence of this practice:

Great interview. You said, “Americans need to start realizing that what American companies got away with five years ago, that era is no more. And the things Chinese companies down the street are getting away with? Well, you’re not a Chinese company.” My consulting company works hard to operate legally in China and we end up paying a lot of taxes. Periodically our our Chinese accounting firm warns us that we will be making a profit and should turn in more FaPiaos (official receipts) or else be taxed. Our General Manager, who is Chinese, tells me that most companies (>80%) try to not show profits in China and practice illegal accounting tactics and bribes to get around paying taxes. It can really bother me at times but it is a reality we must accept. I am comforted at the end of the day knowing that whatever other companies might do, I can sleep with a clear conscience and can stand behind our accounting practices.

Okay, but now, all of a sudden, foreign company after foreign company is being hit with the reality of Chinese tax authorities being unwilling to look the other way. Why is this happening? I think it is because the Chinese tax authorities that might in the past have been happy to look the other way in return for receipt of their own rewards (perhaps from the so-called “accountants” who had allegedly advocated for using fake Fapiaos) have recalculated the risk to reward ratio of doing so and have chosen to fly straight. In other words, what was okay (for a price) in the recent past is no longer okay now.

Like I said, things are really changing in China. But you tell us, are you seeing these things too?

 

 

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Categories: Chinese IP

Quick Question Friday, China Law Answers, Part XI

China Law Blog - Fri, 01/22/2016 - 08:03

How should the Chinese company sign my China contract?

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.

But this next question did not come from a reader and so the beauty of it is that it also comes with a ready answer provided by one of our China attorneys and cc’ed to me pretty much already blog-ready. The question is how should a massive Chinese SOE [called China SOE below] sign various documents relating to a large product sale and the below was the “quick” answer:

Note that the SOE stamped the NNN but did not sign it. Though a stamp is legally sufficient, you should require the normal execution formality: the name of the person signing, his or her title with the company, and the company seal. Of the three, the company seal is the most important. In an SOE, a document that is not stamped with the company seal has little meaning. However, it is acceptable if the seal used is a dedicated contract seal. But in that case, a signature and the title become even more important.

Contract signing issues come up all the time and not just with SOEs. For more on China contract signing formalities, check out the following:

The post Quick Question Friday, China Law Answers, Part XI appeared first on China Law Blog.

Categories: Chinese IP

On Being a China Lawyer and on Doing Business In China: An Interview, Part 2

China Law Blog - Thu, 01/21/2016 - 07:52

On being a China lawyer and on doing business in China

I was interviewed last year by Jason Aquino of Scouts Consulting as part of an ongoing interview series on strategy and innovation in business, sports, and national security. Jason will be releasing this series of interviews in the future, but in the meantime he is allowing me to publish mine here, mostly after I begged him to be able to do so because I liked it so much.

The first part of my interview dealt mostly with the legal industry and the second part dealt mostly with being a China lawyer. I flipped the two around and provided the China portion the day before yesterday and the legal industry portion today.

 

Dan Harris is the founder of Harris Moure, an international law firm with offices in Seattle, Portland, and Beijing. He represents and seeks to protect companies doing business in China and other emerging economies in Asia. His work has been as varied as securing the release of two improperly held helicopters in Papua New Guinea, overseeing dozens of litigation and arbitration matters in Korea, helping someone avoid terrorism charges in Japan, and seizing fish product in China to collect on a debt.

Dan and colleague Steve Dickinson co-author the China Law Blog, which discusses the practical aspects of Chinese law and how it impacts foreign companies doing business there. China Law Blog has been a mainstay of ABA Journal’s Blawg top 100 law blogs, and in 2013 was named to the Blawg 100 Hall of Fame. It is an indispensable resource for lawyers and companies seeking to do business in or around China. Dan’s perspectives on international legal issues have appeared in such publications and media outlets as The Wall Street Journal, Forbes, Fortune, Business Week, The Economist, The New York Times, The Washington Post, CNBC, and BBC News.  

Last April Dan was a keynote speaker at the Oregon Law Review Symposium on Disruptive Innovation in Law and Technology, where he discussed how lawyers could better position themselves in the evolving legal marketplace. He talked about the aversion many lawyers have to marketing, as well as the need for lawyers to become more business-minded, which legal training traditionally hasn’t encouraged. You can find Dan’s paper from the symposium here (p. 881).

 

What are some of the barriers to innovation in the legal industry that you see today? 

One of the common barriers is that most lawyers charge by the hour, which takes away incentives to innovate and become more efficient. Another barrier is the fact that so many law firms are run by 60-year olds.

Not that I have anything against 60-year-olds, but innovation oftentimes comes from people who look at industries in a new way. And young lawyers generally do not have much power in the legal industry.

But don’t law schools recruit students from a diversity of backgrounds? Doesn’t that help bring in new ways of looking at the profession?

That’s actually another problem with the legal industry. You can have a diversity of backgrounds, but law school pounds that out of its students, training all of its students to be incredibly conservative and risk averse.

And it makes sense: a lawyer’s job is to point out risks and help ameliorate them. But what that also creates is a personality that is afraid. Too many lawyers are naysayers.

I can give any business starting out 20 reasons why it is going to fail. But the trick to what I see as the good lawyers’s job is not discourage the client by doing nothing but pointing out the risks, but to help the client surmount potential problems. So many lawyers come up with the 20 reasons for themselves (or for their firm) and view them as reasons not to push forward, not to take risks, not to innovate, not to risk failure.

Is it fair to say that clients moving legal work in-house is a big problem facing law firms today?

There are a lot of reasons why so many law firms are struggling today. That is just one of them. Another is that they’re not really in sync with their clients. Their clients are focusing on business issues. Too many lawyers don’t think the same way as their clients, and that frustrates clients.

You would be shocked (or maybe you wouldn’t) at how many times companies choose our firm over two or three others simply because we were the only one willing to quote them a fixed fee rate on a project. These companies tell me that the other firms insisted that they had no way to know what the project would cost. If a law firm drafts a China manufacturing contract 3-5 times a month (as mine does), how can it not know how long it will take? In the early days when my firm was offering flat fees, some of the lawyers in my firm would try to make the same excuse for being unwilling to come up with a flat fee amount. My response to them was to “get over it and start thinking of yourself as a plumber and now imagine how pissed off you would be if your plumber told you he or she had “no idea” how long a relatively simple project was going to take.

And here’s the thing: take something like writing a manufacturing contract. Ninety percent of those that we take on come within a two to three hour range of each other, with maybe ten percent taking a bit more or less time. It is not as though one will take five hours and another will take twenty hours. And why can’t a law firm doing 50+ China manufacturing contracts a year take on the risk that it might be underpaid just a bit on a few of them? There are two answers to this. The law firm is actually not very experienced with such contracts or it is way too risk-averse.

Then there is the reputation lawyers have for being deal killers. The old saying among businesses is that lawyers always say no. There’s some validity to that. Lawyers must change in the same ways their clients are changing.

I’ve become obsessed with certain companies to see how we can apply what they’re doing to our law firm. For example, I’m fascinated with how a company like Uber has disrupted the transportation industry. What can my firm do on the legal side to disrupt? Our willingness to do so much work on a flat fee basis is somewhat disruptive in that I have actually had lawyers complain to me about our doing that.

In your article for the Oregon Law Review, you talk about the aversion lawyers have to marketing. Why do you think that aversion exists?

One thing that propels lawyers is this idea that the world is a meritocracy. The typical lawyer goes to high school, works hard, does well; goes to undergrad, works hard, does well; and goes to law school, fights to be in the top 10% of the class. Your first job is determined in large part by how you did in law school. Lawyers’ formative lives are based on reaching an attainable, pretty much numerical goal and then being rewarded for it.

Then they get in the real world, and all of a sudden the clients don’t care that they graduated from law school magna cum laude. They care about what you can do for their companies. Lawyers get thrown for a loop by that.

Lawyers don’t like the idea of having to compete. They had to compete in law school, but it was for a very clear goal. Now all of a sudden, they have to meet with 10 people in the hopes of getting two clients, and the carrot at the end is just not as clear cut.

And again, there’s the whole idea of uncertainty and risk. Lawyers will often talk about how this doesn’t work or that doesn’t work, and they do it with marketing, too. So many are unwilling even to try because they cannot get past the idea of failing.

When we first started marketing via our website and our blog, almost all lawyers would say, “I’ve heard you can never get a good clients off the internet.” They would state it like it was a fact, even though they had no evidence to support it.

Lawyers don’t like experimentation, the idea of “let’s try this and see if it works.” That’s too risky. And marketing is that: sometimes you think something’s going to work and it doesn’t, sometimes you think it’s not going to work and it does. The uncertainty kills lawyers.

Looking to the future, what kinds of firms are going to survive?

The first-tier big firms are absolutely necessary and will continue to thrive, as will some regional firms. But then there are the second-tier big firms that don’t have a niche, that aren’t as good as the Skadden Arpses, the Kirkland & Ellises, and the Latham & Watkinses of the world. These second-tier big firms are slowly getting edged out by both big and small firms.

Whenever our firm competes with a second-tier big firm for a matter, I love it because we offer so many advantages over them and yet they charge so much more than us.

The typical client that comes to us is not going to Skadden, Arps. You go to Skadden, Arps for the really big international deals, the really big international litigation. We get smaller international deals and smaller international litigation. Oftentimes we’ll compete for that work with a 250-lawyer law firm not nearly as well focused as us and yet it has a much higher cost structure. They might put five lawyers on a matter on which we would put two lawyers, or three lawyers on a matter on which we would put one lawyer and a paralegal or an international business specialist.

These second-tier big firms like to think of themselves as a Skadden Arps and they are trying to emulate Skadden. But they’re not Skadden.

Have you noticed differences in how the Millennial generation of lawyers thinks and works compared to its predecessors?

Absolutely. The Millennials are more in tune with business. They’re more comfortable with technology, they’re more comfortable operating anywhere, and they’re more comfortable appearing more “normal” and less lawyer-like, not using lawyer-type words. I think they understand better what clients want. Too many older lawyers feel compelled to tell potential clients everything about their own backgrounds and the work that they’ve done, rather than listen to the client and respond directly to that.

There are Millennials who have formed their own law firms, and they use newer technology. Within my firm, I oftentimes have to fight the older lawyers (of which I am one) on certain things. For instance, we set up Yammer – which is really nothing more than an internal Facebook – and some of our lawyers complained. They were worried about security, saying we shouldn’t be discussing firm matters “in the open.” But the security on Yammer is the same as for our emails. Both Yammer and our email are on Microsoft Office 365, and so both are equally unlikely to be compromised.

Then there are various groups in the firm that really use Yammer. One is our Regulated Substances Group, which Hilary Bricken has headed since she was 28 years old. There will be five to ten discussions every day on that group’s Yammer page. Someone will say, “Hey, I read this article about what they’re doing in Oregon. Does this make sense to you?” Or “You know, I just saw that in California, they’re going to do this. Maybe we should be doing that.” Then five or six people will respond to it.

In other groups, somebody will send an email saying, “I’m going to this event, does anyone know anyone who will be there?” They will carbon-copy eight people, including me, and then my inbox will get slammed with twenty emails from three people discussing some person I don’t know who might be at some event I won’t be attending. I don’t care, yet I’ve got twenty emails on it. I am constantly pushing people to stay out of my inbox. Put it on Yammer. Older lawyers often have trouble with that.

Have you seen Millennials struggle with certain imperatives of the profession, like having to actually call people on the phone instead of emailing or texting?

Yes, but I don’t view that as a negative.

One of the things I always talk about in terms of marketing is that anybody can be a good marketer. I used to help coach my daughter’s high school basketball team in the offseason. They had a player who was 6’4” and heading to the University of Washington with a full ride. She was a terrific player, and was going to get 12 rebounds a game. But for us to win, every single starter needed to get four or five rebounds. We couldn’t just rely on her. It’s the same with marketing; everyone needs to contribute in their own way.

There’s this idea among lawyers and probably others that the best marketer is the car salesman or the quarterback type . The reality is that’s just not true. There are many different types of potential clients out there. Millennials can be extremely effective with other Millennials. They can be extremely effective by being who they are, and dealing with people like them. That means texting and emailing instead of calling.

Millennials tend to be very morally centered. They really dislike working on matters when they don’t like the client, and there have been times when they have refused to do so and so we sent the client walking. There’s something to be said for that. They really like working on matters when they believe in the client. We typically discount our fees for not-for-profits. They like that.

This idea that Millennials are lazy, I don’t buy that. I’ve not seen that. They want freedom, and we give it to them. We’re a law firm that doesn’t care when or where our people do their work. We just care about the quality and the timeliness of the work. Our attitude on this jibes with what they are seeking and in that way we are a good fit.

One thing I’ve noticed – and I don’t think this is necessarily peculiar to Millennials, but a factor of being a new lawyer – is that I’m more confident in them than they are in themselves. They’ll look at their workload and see that in three weeks, five things might happen, so they’re reluctant to take on anything new. I see it as my job to convince them to go ahead and take on something new. Of those five things, probably only two or three are actually going to happen. I encourage them to take on a little more risk.

How has technology affected the way you practice law?

I generally dislike most legal technology because it’s lousy. But there is a lot more VC money starting to go into it, so I’m hopeful.

We use a program called Clio. It’s a cloud-based software program geared to law firms, and way better than anything was five years ago. There’s another one called RocketMatter. RocketMatter and Clio very much compete. Both are dubbed “comprehensive legal software.” I would describe them as pretty good – the competition is definitely helping – but every once in a while, we come up with something that’s not that unusual that is just not possible to do in the software.

When it comes to software for our firm, the best software we use is non-legal. One program I always rave about is called DocuSign. It’s very simple, and it just works. I think all programs should be like it. We love it because we can get off the phone and send clients a fee agreement in five minutes. The client doesn’t have to print it out, sign it, scan it, and email it back, which is the way most law firms operate. Everybody in the firm has a record of what’s going on with the fee agreement because it’ll show when it went out and when it was signed, and it’ll stay up in the cloud. It’s really a good program, and there are very few of those that work well for law firms. The proof is that all of our lawyers use it. Here’s a contrast. Our firm is a member of an international legal and accounting association based in Spain. When we joined this association last year we had to sign a document and then overnight the original to Spain. The association would not even accept a pdf!

There’s another software program we love called LawPay. One of the problems law firms have with alternative payments (forms other than check) is that when money goes into a trust account, it cannot touch the hands of a third person. So law firms cannot use PayPal or credit cards for trust account payments. If you have a big case and you’re charging by the hour or by the month, or if you want an advance fee payment, you have to use something like LawPay. LawPay may be the only company that does this and somehow it’s set up so that it complies with the bar rules.

Now we can get off the phone with people – it happens two or three times a month – they’ll sign the fee agreement, and we’ll be paid within 10 minutes. It’s just amazing. This is unbelievably efficient for everyone involved and our clients will often compliment us on it and I have no doubt it makes them feel even better about having chosen my firm for their legal work.

What would you like technology to do for you that it presently can’t?

We’re an all-Mac law firm, and as far as I know there is no good document generation software for Mac that’s dual language. We do five or six manufacturing agreements a month with Chinese manufacturers. These agreements are fairly complicated agreements and vary with each client, each product, and each manufacturer.

A manufacturing agreement for having your candy made in China is going to be very different from a manufacturing agreement to have golf carts made in China – the time periods, the standards, etc. But there are always going to be similarities. What I would like is a document system that would allow us to easily pull and re-use provisions in both the English (or the Spanish or the German or the Japanese) and the Chinese. For instance, if we know that there is going to be a 1% penalty for every day beyond a week that the product delivery is delayed, it would be nice to be able to review our ten best delivery delay provisions and just click the one that best fits, in both languages.

Like in a dropdown menu in the software? So you don’t have to copy-paste from past agreements? 

Exactly. That’s not out there yet. We charge a flat fee for these manufacturing agreements, so any inefficiency is on us. If we could save even 30 minutes on each one, that’s real money. We would be willing to pay a lot for a Mac program that could do that in both our client’s first language and in Chinese.

Have you ever applied an idea from another field to help you do your job better?

All the time. Henry Ford. I want everybody to have the exact same computer in our firm, we buy our desks from the same company, and everybody has the same chairs. I want the small things to be systematized, so that we are freed up to deal with the bigger things. If somebody has a problem with his or her computer, I don’t want a staff person to have to spend three hours researching the best computer to buy. He or she can just replace it right away with a MacBook Air. It takes three minutes. The same is true if we need a new chair or a new desk.

We have loyalty with our vendors because it allows for smoothness. Could we maybe get a better deal somewhere else? Yes, but then we are taking a risk that it will be a disaster and five hours will be wasted. I borrowed that from Henry Ford. I want our firm on the low-level things to be an assembly line, to be routinized.

 

The post On Being a China Lawyer and on Doing Business In China: An Interview, Part 2 appeared first on China Law Blog.

Categories: Chinese IP

9 Tips for China Product Sourcing

China Law Blog - Wed, 01/20/2016 - 09:50

How to deal with Chinese manufacturers

Helping American and European companies deal with their China manufacturers is something my firm’s China lawyers do every single day. And though our work focuses on the legal side, our having been involved with literally thousands of manufacturing related contracts (mostly NNN Agreements, Product Development Agreements, Licensing Agreements, and OEM Agreements) does mean that we are pretty tuned in to what works on the business and sourcing side as well.

So when I saw someone on Linkedin (please check out our thriving China Law Blog Group there!) link over to an article entitled, Supplier Negotiations: 9 Tips for Making the Right Deal, expecting great things. But the article never mentions sourcing from anywhere in Asia and it is in most respects simply not relevant for that. The writer is an Australian in Australia and so I will just assume that it was written for sourcing within Australia and examine whether and how each tip applies to China sourcing or not. Note that this is NOT an attack on this article, it is merely a contrast piece as to how sourcing from China can differ from sourcing from the West and to stimulate thinking and discussion on the best tips for sourcing from China.

The italic portion below are direct quotes from the article. The regular font portion are my own comments.

1. Learn about the supplier’s products, processes, costs and market. You’ll be your own best advocate only if you understand a supplier’s processes and its operating environment. By talking to a number of vendors, you’ll learn the industry jargon, the products available, as well as the expertise of individual suppliers. This information will be valuable during negotiations with a supplier, particularly in evaluating concessions that your supplier might consider. This does apply to China. We are always telling our clients to go visit their own factories in China and other factories and not just rely on what they are hearing from their agents or the factories themselves. This website quote from co-blogger Steve Dickinson rings very true here: “A day on the ground is worth a month in the office.”

2. Become a value-added customer. Before you enter negotiations with a supplier, consider how you can help the supplier realise the value in other aspects of his business. Doing so can turn a business transaction into a strategic partnership. For instance, let the supplier know you are a source of repeat business and make the company aware of how much business they can expect based on your purchase history. My strong sense is that this does not work for China, which is in many ways unfortunate. Chinese factories have had so many unfulfilled promises of future large orders that I think they mostly just ignore them. In fact, I sometimes wonder if making this promise might actually hurt in a sourcing negotiation. What do you think?

3. Change your demand pattern. You can revise your purchasing policy by consolidating your purchase orders. For example, rather than authorising individual departments to issue purchase orders to one supplier, require that the requirements be combined in one consolidated purchase order, the size of which must be large enough to earn a price discount.

Also, you might also create a purchasing consortium with other companies and place orders with one or a few suppliers, rather than many. Your company might also switch from one material requirement to a lower-cost product. Sure. Buying more will usually get you a better price than buying less.

4. Agree to larger deposits on orders. “Accounts receivable days” affect the cash flow of all companies, so you might agree to a large cash deposit on orders to secure you a significant product discount. For instance, a 50 percent upfront payment might earn a 10 percent discount, or improved delivery terms or product customisation. This does not translate well at all for China, for many reasons. First off, the lower the deposit the safer you will be. Second, most Chinese factories are pretty unyielding on their required deposits and just getting one to agree to a deposit as low as 50 percent would be a real accomplishment. We draft plenty of contracts where the Chinese factory refused to come down from 70 percent, sometimes even 90 percent upfront. For more on this, check out China Manufacturing Payment Terms. Limit Your Risks.

5. Agree to high-dollar purchase. If you transfer all of your business to one or a few suppliers, rather than many, you’ll receive deeper discounts and, perhaps, other perks. But before you give your business to a few suppliers, consider the increased risks of doing so. Not sure how this differs from numbers 2 and 3 above. Ordering larger quantities will usually get you a better price than ordering smaller quantities.

6. Be a customer that solves issues, not presents issues. A supplier’s profit margin can be eroded by customer production, delivery or quality issues. So to get a better deal, be reasonable when making demands. If by this the writer is suggesting that it will pay off for you to establish a good relationship with your supplier, than I completely agree and this holds true for China as well. For more on this check, out How To Keep Your China Manufacturer Motivated And Why That Matters.

7. Implement a bidding process. To ensure competitive pricing, use a bidding process to solicit business proposals from multiple suppliers. Doing so makes it clear your company will buy materials from the supplier that submits the most competitive bid. Yes and no. Yes, in that this can work if you really know what you are doing with respect to your product, with respect to the manufacturing of your product, and with respect to how Chinese companies do business. But if you do not know all of these things you might very well end up with really cheap product, really badly made.

8. Consider all aspects of your purchases. Supplier prices may not be nonnegotiable, but other aspects of a purchase, including the down payment, bulk discounts and shipping rates might be. For instance, you might negotiate an enhanced product warranty or extended payment terms, each of which can improve your cash flow. Again, Chinese companies are not big on negotiating payment terms. More importantly, you should always seek to have an “enhanced product warranty” (whatever that means) but at the same time, you should recognize that if your product causes USD$10 million in damages back in the United States or wherever, your enhanced product warranty is not going to mean that your Chinese factory has the money to remedy your damages problem.

9. Cease doing business with supplier. As a last resort, you can cancel existing orders and exclude the supplier from future competitive bidding rounds. Before you institute this process, meet with the supplier and ask for a price concession. Also, confirm that another source of supply is available. The most important thing to do before terminating a Chinese supplier relationship is to be prepared for all the bad things that will likely happen from that termination and to have another supplier already lined up and ready to go. For more on this check out How to Terminate your China Supplier: Very Carefully.

And if you want to read more about how to handle your China product outsourcing, check out the following:

What are your thoughts?

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Categories: Chinese IP

On Being a China Lawyer and on Doing Business In China: An Interview

China Law Blog - Tue, 01/19/2016 - 12:44

On being a China lawyer and on doing business in China

I was interviewed last year by Jason Aquino of Scouts Consulting as part of an ongoing interview series on strategy and innovation in business, sports, and national security. Jason will be releasing this series of interviews in the future, but in the meantime he is allowing me to publish mine here, mostly after I begged him to be able to do so because I liked it so much.

The first part of my interview dealt mostly with the legal industry and the second part dealt mostly with being a China lawyer. I am flipping the two around and providing the China portion today and I will be providing the legal industry portion the day after tomorrow.

 

Dan Harris is the founder of Harris Moure, an international law firm with offices in Seattle, Portland, and Beijing. He represents and seeks to protect companies doing business in China and other emerging economies in Asia. His work has been as varied as securing the release of two improperly held helicopters in Papua New Guinea, overseeing dozens of litigation and arbitration matters in Korea, helping someone avoid terrorism charges in Japan, and seizing fish product in China to collect on a debt.

Dan and colleague Steve Dickinson co-author the China Law Blog, which discusses the practical aspects of Chinese law and how it impacts foreign companies doing business there. China Law Blog has been a mainstay of ABA Journal’s Blawg top 100 law blogs, and in 2013 was named to the Blawg 100 Hall of Fame. It is an indispensable resource for lawyers and companies seeking to do business in or around China. Dan’s perspectives on international legal issues have appeared in such publications and media outlets as The Wall Street Journal, Forbes, Fortune, Business Week, The Economist, The New York Times, The Washington Post, CNBC, and BBC News.  

Last April Dan was a keynote speaker at the Oregon Law Review Symposium on Disruptive Innovation in Law and Technology, where he discussed how lawyers could better position themselves in the evolving legal marketplace. He talked about the aversion many lawyers have to marketing, as well as the need for lawyers to become more business-minded, which legal training traditionally hasn’t encouraged. You can find Dan’s paper from the symposium here (p. 881).

 

How did you get into doing China work?

We’ve done a lot of international maritime and international litigation work, and we were known as the firm that could get things done in Russia. The Wall Street Journal did a cover story on some very unusual work we did for Caterpillar Financial. The contract provided that if Caterpillar didn’t get paid, it could seize these three ships without having to go to a court. We spent about six months planning, went to Russia and got the ships out. It got a lot of press, and then everybody started hiring us for those things.

Soon China started entering into that equation. I ended up going to China on behalf of a big Singaporean fuel supplier that was owed a lot of money. We also arrested fish product in China from a Danish company that owed our client money. While in China I became friendly with a lawyer in Qingdao, and also realized that China was where it’s at. The same thing started happening in a host of other industries. Our clients who had been focused on Korea or Russia or Japan started getting serious about China.

I convinced a friend of mine, Steve Dickinson (who had headed up the international law group at a big firm where both of us had worked, but was now teaching Chinese law at the University of Washington) to get back into the real world. We sent him to China, and it just took off from there. It was amazing how quickly it happened. There was such a demand for a law firm that would help small- and medium-size businesses deal with China. These companies were lost.

How would you describe the ethos of the Chinese legal system?

China’s legal system is geared to achieve harmony. Harmony has a lot in common with fairness, but it’s not the same thing. It’s closer to the legal conception of equity: if you and I are in a lawsuit, equity is what’s fair for you, what’s fair for me, what’s fair for society, what’s going to cause the least amount of waves. That’s China.

Also, Americans are so focused on substance over form. The ethos of an American company, especially a tech company, is to “just do it” and then deal with any problems in the foundation later. That doesn’t work for China.

A lawyer once called me and asked how much capital it would take for his client to form a company in China. I said, “It’s hard to know, I’d have to check, but I’m guessing it would probably cost $5-10 million because you’re going to have to buy the equipment and that’s going to be a lot of money.”

He goes, “Right, but we’ve already bought the equipment. And we’ve already sent it to China.”

“You have?”

“Yeah. So we can use that equipment towards our minimum capital, right?”

“No, you can’t.”

“Well, we spent $10 million on that equipment. Are you saying we have to spend another $10 million on equipment?”

“I’m not saying you need to spend another $10 million on equipment, but I’m saying that the $10 million that your client has already spent isn’t going to count. For anything that you’re buying, you have to get approval – a valuation or an appraisal –  before it can count for the capital requirement. You haven’t done that, and you can’t do it after the fact.”

“Well, that’s ridiculous. That’s putting form over substance.”

Whenever lawyers say that to me, I don’t know what to say. What can I say? It’s Chinese law. It is putting form over substance, but Chinese law is a lot of times based on that. China does not want its bureaucrats to have much discretion, because with discretion comes bribery.

What is also fascinating is that American companies think of China as the wild, wild west far too often. We had a company that makes a product with chemicals in it, and it took them – I’m going to make this up because I don’t really remember – $3 million and a year to get U.S. EPA approval to use the chemicals in the product. They go over to China, they build this factory, it’s all ready to go, and then they call us up and say that they’re being blocked from bringing these chemicals into China.

They didn’t realize that they would have to get their chemicals independently approved in China. It cost them three or four more months. It never occurred to them that China would be like the United States. The U.S. is not going to say, “Oh yeah, go ahead, put those chemicals in this product because it’s allowed in Malaysia.” That’s not how the U.S. works. That’s not how China works, either. So you get this situation where people assume that China’s completely different from the United States.

Other times, they will assume it’s the same. Here’s where we see that the most: you can fire somebody in the U.S. for good reason, bad reason, or no reason at all. You can’t do that in China. We are constantly getting calls from companies that are being threatened by ex-employees because they fired them. China is a communist country. It’s got major workers’ rights. You don’t fire somebody without getting a settlement and release. You just don’t. It’s not the U.S., and American companies have trouble grasping that.

As best you know, how does China’s history and culture shape or inform its legal norms?

This whole idea of harmony is very much a Chinese cultural phenomenon. China has 1.5 billion people. They need to get along.

What’s fascinating about the Chinese government is that it’s not a democracy like in the U.S., but it does answer to its people. It does listen to its people; not on everything, but on a lot of things. Legitimacy is very important to the Chinese government, and its legal system helps them maintain legitimacy. It’s very tailored to its history, and to the future it wants to shape.

How would you describe the Chinese style of negotiation?

Well, it ain’t win-win. It’s win-lose. In fact, if you talk about win-win, they’re just going to think you’re disingenuous, and that you’re using it as a tactic to crush them.

They can be very tough negotiators, and Americans are not used to that. It’s a completely different style of negotiation.

As you’ve learned more about China, what has surprised you the most?

What surprised me was that if I were to pick a country China is most like, it would be the United States. I dealt with Korea and Japan for many years before I started dealing with China intensively, and it is more like the United States than either of them.

In Japan, Tokyo is everything. In Korea, Seoul is everything. They are homogeneous countries, and China is not homogeneous. It is a big country like the United States, and a lot of the ways that Americans look at the world, the Chinese do too.

You can become a really big company without ever really leaving the United States. You can become a really big company without ever leaving China, too. What happens with Chinese companies is that they get really big and really successful in China, and then they come to the United States and try to do the exact same thing and it’s a complete disaster. American companies are getting better at this, but they still tend to do it in China sometimes. Americans and Chinese have the most difficulty making adjustments because they really haven’t had to.

Is there something about doing business in China that lawyers believed to be true, but never was?

People will say you can’t trust the Chinese, and that’s never been true. A lot of times, what Americans view as dishonesty is either miscommunication or cultural differences.

Take something as simple as, “Can you get me this product in 30 days?” The Chinese manufacturer will say, “No problem.” But they don’t think it means, literally, 30 days every time. They think it means we’ll try to get it to you in 30 days; sometimes it will be 45. It’s a cultural difference. It’s not dishonesty.

China’s culture is much more relationship-based than ours. Once you’re in a good relationship with a Chinese company, there’s usually hyper-honesty. There are companies out there that have had 20-year relationships with Chinese companies that have worked beautifully, where there’s huge amounts of trust.  We have had 10-plus-year relationships with a number of Chinese law firms without even the slightest hitch.

You do have to look at the culture and the history in that it’s more difficult for Chinese to trust because there’s been so much rapid change.

What do peers in your practice area think, say, or do all the time that strikes you as wrongheaded?

I remember a bankruptcy trustee who hired us to get money in China. We got them some money, and it wasn’t all that hard. The trustee said, “Wow. I had always heard that there basically was no legal system in China. I just wish I’d come to you sooner, because I’ve probably had five other cases where we could have gotten money.”

There is a legal system in China. There are lawyers who believe there isn’t, that “of course we need to set up our contracts so that all disputes are resolved in a Chicago court because if we go to China we’ll get slaughtered.” They put that in the contract, and they’ve just harmed the client because there’s never a way to collect. Chinese courts do not enforce U.S. judgments.

So, that’s one belief that is wrong. Most errors stem from the belief that everything needs to be done the American way.

Looking at your practice area, what has been the biggest development in the last five years?

Things that American and European companies could get away with in China five years ago, they can’t anymore. China now has sophisticated tax and tax collection systems. China has gotten a flavor of what it means to collect taxes, and they love it. Like all governments, they want your money. And if you’re not going to pay them the money that they believe they are owed, they will make your life miserable beyond any conception of the word miserable.

Americans and Europeans are getting in major trouble for this. We see it in two areas constantly.

An American or European company will hire, say, three “independent contractors” in China. The Chinese government will come to the American or European company three years later and say, “What are you doing? You have three employees but haven’t paid employer taxes for the last three years or withheld employee taxes. We’re going to say that you’re doing business in China because you have these three employees, so you owe company income taxes. And by the way, employer taxes and benefit taxes equal, like, 40% of what you paid them in salary for the last three years. And we’re going to charge you interest and a penalty. And if you don’t pay, we will shut down your business here and we may not let you leave the country.”

“What? They’re just independent contractors,” the Americans or the Europeans will argue. Well, guess what? If they’re not your cleaning person, or your plumber who’s coming to fix your sink for two days, and you’re paying them money and they don’t have a company, they are your employees.

The other thing is that Americans will set up a company in China that sells a service or a product back to the parent company in the United States. They set it up so that the company in China makes no profit. It is called transfer pricing. But the Chinese government will come in and say, “People don’t run businesses for no profit. We’re going to impute a 30% profit, and you need to pay the last three years’ taxes on that plus penalties, plus interest.” And the Americans freak out.

What you should do is bring on accountants who understand transfer pricing and they will figure out that the typical profit margin is, say, 6-10%, so maybe they put you down for 8%. The Chinese tax authorities will look at that and won’t mess with you. But if they have to come in and you’re making no profit, they don’t start at 8%. They come in at 30%.

That’s how governments always work. Americans need to start realizing that what American companies got away with five years ago, that era is no more. And the things Chinese companies down the street are getting away with? Well, you’re not a Chinese company.

Oh, and we are seeing a lot more disputes between foreign and Chinese companies that are no longer just getting shoved under the carpet. Both sides are realizing that it sometimes makes sense to litigate or arbitrate.

Looking out five years, what concerns you the most? What excites you the most?

It concerns me that American companies are getting on the wrong side of the Chinese legal system. But it also excites me because China’s legal system is becoming more developed, more advanced, and more secure – more real. That means an increased need for lawyers. Every time China tightens a screw our China lawyers get more work.

What also excites me is that I am seeing this happen to Chinese companies, too. That’s more important for China than that it just be happening to foreign companies. China does want to reduce corruption. Big Chinese companies pay their employees; they pay their employer taxes. A lot of them operate similarly to foreign companies, and it’s being pushed down to other Chinese companies.

What’s also exciting is the Chinese who come to the U.S. and then return to China. They are more international-thinking than typical Chinese. They go to Chinese companies and make them more international. But very, very slowly.

Is there work that you don’t really do a lot of today that you expect to see more of in the future?

Yes. That would be representing Chinese companies doing business in the U.S. or elsewhere. We’re very well equipped to represent them. We have around a half-dozen lawyers fluent in Chinese and we have two Chinese lawyers. We’re efficient and small, so Chinese companies tend to like us.

The problem is that we’re not willing to reduce our fees for them. A lot of firms will cut their rates to rock bottom to bring in Chinese companies, in the belief that they’ll be able to raise their rates later. We’re not willing to do that. We charge our regular rates to Chinese companies, and if they don’t like it they can walk.

A lot of them don’t like it, and our attitude is that we have plenty of business representing North American and European and Australian and even Korean and Japanese companies at these rates. We tell the Chinese companies to come see us in a year or two, and sometimes they do. We have not made any effort to bring in Chinese clients because it would take so much effort, and Chinese clients right now are very difficult clients.

Right now we prefer North American, European, Australian, South American, and Latin American clients. But I expect that’s going to change as Chinese companies become more international. It happened with Russia and Korea. We used to not like Russian or Korean clients because they tended to be unsophisticated in how they used lawyers. Now we love Korean clients, we love Russian clients, and eventually we’ll come to love Chinese clients.

What do you mean when you say Chinese clients are very difficult clients?

I’ll backtrack a little and tell you the problems American companies often have with Chinese lawyers.

An American company will hire a Chinese lawyer and tell the Chinese lawyer, “I want to do ‘A,’” and the Chinese lawyer will do “A.”

Three months later the American company will learn that no one’s doing “A” anymore. They’re all doing “B.” So it will go back to the Chinese lawyer and say, “Look, we did ‘A.’ Now everyone’s telling me that wasn’t a good idea.” The Chinese lawyer will then say, “Right, it was not a good idea.”

“Then why did we do ‘A’?”

“Because you told me to do ‘A.’”

It drives American companies nuts. If you had called up an American lawyer, he or she would have said, “Why do you want to do ‘A’? We do ‘B’ 99% of the time. Let’s talk about it.” When somebody tells me they want to do something, I don’t just say, “Yes.” I ask them 10 questions because I want to make sure that’s the right way to go.

The typical dynamic between Chinese companies and Chinese lawyers is, “I’m the boss. You’re my scrivener.”

One time we were brought in to help a Chinese company. Twenty years ago it had formed an American company, and then that American company had formed a Chinese company. It’s called a “roundtripper.” China once gave all sorts of preferences to foreign companies; Chinese nationals would form American companies, then go back to China to get the preferences. Not legal, but it was very common.

This Chinese company had gotten huge. They had a company in the United States that was formed by somebody’s cousin, had never paid taxes, and maybe had aspirations of going public. They needed to clean up their act. It was hugely complicated, and we brought in an international accounting firm to help on the tax side.

My colleague Steve Dickinson is based in China, and one of the lawyers we work with there invites him out to lunch. Steve is thinking, “That’s weird. This lawyer never invites me to lunch.” Steve goes to the lunch and the client’s there, and the client has this idea on how to solve the problem in about 1/10 the time and at about 1/100 the cost of what we have said needs to be done.

Steve tells the client (nicely, I presume), “Are you kidding me? You know nothing about U.S. laws, you know nothing about U.S. taxes, you’re not a lawyer or an accountant in China, and you think you’ve just solved the problem? Give me a break.” Why was Steve brought to this lunch? Because the Chinese lawyer knew it was absurd, but he just was not comfortable telling this to his client because that is not his role.

When Chinese companies come over here to the United States, they often want to tell us exactly what to do. Once we took on a case where as soon as we were paid, the Chinese company told us how we were going to handle it. We told them that what they were asking us to do would be the dumbest thing we could possibly do. (I talked with about 10 other lawyers and they were like, “Seriously?”)

“No, we need you to do that,” the Chinese company said.

We responded, “Nope. Here’s your money back.”

As lawyers, we can’t have that. Our reputations are on the line. We’re not going to do something that makes us look silly and just wastes the client’s time and money. We’ll do things for clients even if we disagree, but not when it’s absurd or unethical.

How pervasive is suspected Chinese hacking of law firms?

I don’t know. I just assume that they’re getting into my computer when I’m over there. Before we did a lot of work with China, we did a lot of work with Russia. Our Russian clients would never talk to us about anything important on the phone because they assumed they were being bugged. I always assume the worst and prepare for that.

It’s not just the Chinese government that does these things. It goes on from company to company, and from country to country. I have no idea how much, but are law firms immune? Absolutely not.

What special precautions does your firm take when you’re operating overseas?

We generally do not keep data on our computers. We keep it in the cloud, and we don’t access it when we’re overseas. We also don’t allow access to much of our data from any location other than our own offices. If our lawyers want to get on our network, they have to show up from certain ISP addresses. It makes things more difficult – if they’re at home and their home ISP has not been cleared they can’t get onto our network – but it’s a necessary security measure.

What is it about China that continues to mystify you? What would you like to learn more about?

What’s fascinating about China is that there is no Chinese archetype. China is not monolithic. If you spend a month in Shanghai and come back to the U.S., you’ll describe China in one way that has no reality for most of the rest of China. It is an incredibly diverse country.

That’s what’s exciting about China, and that’s also what’s exciting about the United States. In fact, China has a ton of minorities, just like the U.S.

But what we have over China – and I’m stealing this from a vice president at Microsoft who talked about this – is that China is not diverse in the way the United States is. A company like Microsoft, if it’s having an issue regarding, let’s say, Ethiopia, it can call together ten Ethiopians in Redmond, Washington, and figure out what to do. We have people from so many different countries who want to be here and on whom we can rely to bring their different views. China’s not even close to that level.

I have known so many Americans who have gone to work for Chinese companies to lend an American perspective, and they’re not listened to at all. China is still much more China-centric than the U.S. is U.S.-centric.

What’s a formative experience that has shaped how you make decisions or see the world?

I lived in France for a year when I was in fourth grade, and I lived in Turkey for a year when I was in 11th grade. So, living overseas definitely shaped me. My parents obviously shaped me because they were the ones who took me overseas. They were the kind of people who found it exciting to go to new places that were different. What also has shaped me is meeting all different kinds of people from different parts of the world.

I love the United States. I describe myself as patriotic even though that’s old-fashioned. But we don’t have a lock on things and it’s not good for us to think that we do. It drives me crazy when Americans say stuff like “we have the best healthcare system in the world,” or “we have the best food safety system in the world.” People think we’re the least corrupt country in the world. None of that’s true.

It’s an arrogance that can be destructive – we’re the best; we don’t have to work at it. I’m not saying we should become like China or Denmark or whatever, but I am saying we can and should learn from other countries.

How do you clear your head when life gets hectic?

I enjoy life. I work out every single day. I love eating good food. I love being with my family. I love watching basketball. I love traveling for fun. I love traveling for work. I go to movies. I binge watch TV shows. I voraciously read and listen to the news.

I learned early on not to stress out. When I first started practicing law, I went to a movie and the entire time I was thinking about a particular case. I didn’t enjoy the movie and I didn’t accomplish anything in terms of work, either. What I realized is that either you do one or the other. You go have fun or you work, but if you try to combine the two, it’s not going to work. You really do need to focus. If you have time to go to the movies, enjoy the movie or don’t go. Make your time count. That reduces stress.

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Categories: Chinese IP

Litigating or Arbitrating Against Chinese Companies

China Law Blog - Mon, 01/18/2016 - 08:22

What we are saying is that litigation cultures of China and the West differ.

This is the first in what will be a long series on what it takes to litigate or arbitrate successfully against Chinese companies. Disputes between foreign and Chinese companies are on the rise both because both sides on China-foreign transactions are becoming less tolerant of infractions and because China’s economy is on the decline. There is an old saying about how lawyers do well when an economy is either rising or falling, just not when it is stagnating.  Put simply, litigation occurs when a company has decided that the highest and best use of a particular chunk of its time and money is to sue someone. When profits are difficult to find outside litigating, litigating becomes more likely. Companies in financial pain tend to lash out by suing or by threatening to sue and we are seeing a wealth of that these days from Chinese companies.

Many years ago, I wrote an article for the Wall Street Journal, Chinese Companies Court Disaster, on how Chinese companies are generally ill prepared for the U.S. legal system. Though this is true of most foreign companies that come to the United States or do business with U.S. companies, the huge differences between our two systems, and even the way Americans feel about China, have made things even tougher for Chinese companies in U.S. Courts. The same holds equally true for Chinese companies in Canadian and Australian and most European countries’ courts as well. Anecdotal evidence among the China lawyers and the litigators at my firm and from others suggests lawsuits against Chinese companies are rapidly increasing yet Chinese companies do not seem any better equipped to handle these lawsuits than when I wrote the Wall Street Journal article more than five years ago. To put it bluntly, Chinese companies making big mistakes whenever they litigate or arbitrate outside China, either as plaintiffs or defendants:

But Chinese companies are needlessly putting themselves at an even deeper disadvantage by making basic mistakes. The first is a failure to do the planning necessary to avoid lawsuits in the first place. In the U.S., companies generally view lawyers as counselors whose job includes helping their clients prevent legal problems, while also making sure the company is best positioned if a lawsuit does pop up (for instance, by helping to draft precisely worded contracts). In China, executives tend to view lawyers as technicians whose job is simply to navigate the court system when a lawsuit arises, rather than as strategic legal planners. This has been a factor in the growing area of U.S. intellectual property litigation against Chinese companies, where often a competent American lawyer would have warned the Chinese manufacturer early on of potential IP problems with a product had the company sought counsel.

This series is going to focus on how foreign companies doing business in China or even with China can best avoid disputes with their Chinese counter-parties and, equally importantly, it is going to focus on how to handle a dispute with a Chinese company should one arise. Please stay tuned.

 

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Categories: Chinese IP

Getting Money Out of China, Part 2: Don’t Fall for the Scams

China Law Blog - Sun, 01/17/2016 - 08:59

Want to get money out of China? Keep calm and don’t panic.

Last week I wrote a post entitled, Getting Money Out of China: What the Heck is Happening?  The post focused on how the China lawyers at my firm have in just the last week or so received more communications regarding difficulties in getting money out of China than in the last year. Since that post, the number of such communications has only increased, which actually could be due to the post.

In an effort to solicit more information on the state of China money transferring, I put the post up on our Linkedin China Law Blog Group page. In response to our posts, we have received a slew of comments and even a bunch of emails from people offering to help in getting money out of China. I deleted all of the comments and none of our China attorneys have responded to any of the emails.

And here is why.

Far too many China money couriers are scam artists, especially those who “carry” for foreigners. There are a million ways to get money out of China illegally, mostly involving fake invoices and literally carrying gobs of money to Hong Kong and elsewhere. Huge amounts of money illegally leave China every year and presumably much of that money gets out without anyone getting scammed. There are all sorts of “trusted networks” that enable these funds to leave.

But as a foreigner or as a foreign company you almost certainly do not have the ability to tap into such a trusted network and you should not be fooling yourself on this. Over the years, our firm has been contacted or heard from truly reliable sources about the following such getting money out of China scams:

  • A U.S. company came to us many years ago after having given two million dollars in cash to an American lawyer who operated (still operates as a matter of fact) in China. This American company was having trouble getting its money out of China and the American lawyer assured them that his plan was completely legal and would cost only $100,000. Now whether this American company truly believed the plan was legal is another question, of course. The plan was to have a trusted and connected person take the cash to Hong Kong, deposit it into his own bank account and then wire the $1.9 million to the American company’s U.S. bank account. The money disappeared and we were retained to get it back. Our advice ended up being that the risks to the American company in exposing this lawyer and trying to get the money back were too high and the company literally walked away. We were concerned that the American company would have to pay taxes and penalties to the Chinese government on the funds and, most importantly, we were concerned that exposing what had happened might lead to the company being shut down and company personnel being arrested.
  • Every so often, we are contacted by an American or a European or Australian company that sought to shut down its China operations improperly. For the right (but difficult) way to close down a China WFOE, check out How To Close A China WFOE Without Going To Jail.In an effort to avoid having to sit down with the China tax authorities and pay all past due (and oftentimes some not due) taxes, these companies had hooked up with someone with a “better idea.” The better idea is to send the China WFOE’s remaining funds out of China as payment for services provided to the WFOE by a company overseas. This scheme typically involves drafting a fake contract and invoice for the services not actually provided to the WFOE. This scheme is typically carried out by a Chinese citizen with a company outside China drafting the contract and issuing the invoice. The Chinese citizen has usually offered to do the deal for 10 to 15 percent of the funds, to be paid after the funds hit the Chinese citizen’s company outside China. I’m guessing most of you have by now guessed why our China lawyers get calls on these deals. Right. The money goes to the company outside China and the American or European or Australian company never gets a penny and it now wants us to pursue the scammer for their money back. My firm has actually taken on a few of these and actually managed in some cases to get some money back (talk about both parties falling off a cliff negotiating), but our strong advice is never to do such a deal.
  • Thanks to China having increased its tax collection efforts against foreign companies, we also are more often finding ourselves dealing with a variant on the situation above. Here is an amalgamation of what we are seeing. Owner of China WFOE calls us from his (because it has always been a male) home country to tell us that its China WFOE is in the process of going through a tax audit in China. The WFOE owner “may” have done some things improperly in China and wants to know whether he should return to China to assist in the audit. Our answer is always something like the following: “if you ‘may’ have done something improperly in China, you absolutely should stay away from China.” We then learn that the WFOE owner was convinced by one of its own Chinese employees to submit false fapiao and (it has always been “and” not “or”) to send money out of China using false contracts and false invoices. It is now pretty clear that the Chinese tax authorities know exactly what the China WFOE did and they are just lying in wait for this American (because every time it has been an American) to return to China to “complete” the audit. The American wants to know what to do and pretty much every time, they ask if we know anyone who might be interested in buying their WFOE. To which my response is something like the following (minus most of the incredulity and the sarcasm added below):

Wait, let me get this straight. You have a WFOE in the middle of a tax audit in China that you know will reveal that the WFOE has for years been engaging in money laundering and tax fraud. In fact, you are so concerned about what this audit will find (or really, has already found) that you are hiding out in the United States because of it. And yet you want to know whether I will go to any of my clients to see if they might be interested in buying this now dying WFOE? Do you really think there are people out there dumb enough to buy such a company without conducting any due diligence on it and thus fail to realize that they are buying into nothing but financial and maybe even criminal liabilities? More importantly, do you really think that I am going to push this turd onto one of our existing clients? Just out of curiosity, why would you think my law firm would do this?

Just don’t let any of the above happen to you. Especially now. Or ever. Don’t panic and do something stupid.

 

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Categories: Chinese IP

How to Form a WFOE in China, Part 13: What About A Licensing Agreement Instead?

China Law Blog - Sat, 01/16/2016 - 10:41

This is part 13 of our series imaginatively entitled, How to Form a WFOE in China. The last post in this series was How to Form a WFOE in China, Part 12: Do You Really Even Need One? In that post we reiterated how difficult it is to form a WFOE, to operate a WFOE in China, and even to shut down a WFOE in China. For all of these reasons, whenever someone contacts one of my firm’s China lawyers, the first thing we do is determe whether a WFOE is really even necessary.

This is the first question our China lawyers ask anyone who says they need a China WFOE.

If you will be employing anyone in China or want to get paid within China, forming a WFOE will usually be your only option.  But what are your other options if a WFOE is in fact not neccessary?

In part 12 we discussed how entering into a distributorship relationship with a Chinese company (or companies) can be a good option for companies that want to profit from China without setting up a company there. Licensing arrangements with Chinese companies can be another great way to make money from China, without forming a WFOE there.

 

To describe licensing deals with Chinese companies as hot would be an understatement. Five years ago, my firm probably did two or three such deals a year. We now do probably two or three each month and that number just keeps increasing. American and European companies and their European counterparts have realized that licensing arrangements can be a great way for everyone to make money and fast. This is particularly true in those industries (the internet being a prime example) where going into China as a foreign company is either prohibited or restricted.

But licensing your product or your brand name or your technology to another company will always be fraught with risks, and licensing to a company in China has its own special challenges.This post will focus on technology licensing, leaving brand licensing for a subsequent post.

The first thing you should do before licensing your technology to a Chinese company is to make sure that doing so is legal under the laws of both your own country laws and under China’s Regulations on the Import and Export of Technology. If you are a US company, make sure that US export control laws allow you to transfer (very loosely defined) your technology to China. Canadian and European and Australian companies should do the same under their applicable laws.

China divides technology licensing into three categories: prohibited, restricted, and transferable. Prohibited technologies cannot be imported or exported. Restricted technologies may be imported or exported only if the Chinese government has granted approval to do so. A transferable technology may be imported or exported but the agreement licensing the technology (or at least the fact that there was a licensing agreement) must be recorded with the appropriate Chinese government agency.

Your licensing agreement should properly identify your Chinese counterparty (in Chinese) and you should confirm that your Chinese company you identify in your licensing contract actually exists as a registered Chinese entity. Typically, the easiest way to confirm identity is to request a copy of the Chinese company’s business license and then use the information on that license to confirm necessary details with the local AIC office. Our China attorneys go through this basic due diligence on every contract.

The license agreement should include a Chinese language translation and the Chinese language should be the controlling language. The agreement should be governed by Chinese law and written so as to be enforceable in a Chinese court or before an appropriate arbitral body. As noted above, license agreements must be registered and that registration requires a Chinese language version. We have also found that many agencies in China will not register the licensing agreement if it is not controlled by Chinese law. Further, and even more important, payment of royalties requires that the Chinese entity make use of a Chinese foreign exchange bank and sending money out of China will require that your licensing agreement be presented to the Chinese bank in the Chinese language. Many Chinese banks will refuse to make payment if the license is not subject to Chinese law and jurisdiction.

I will go into more detail on how to draft a China licensing agreement in subsequent posts.

The post How to Form a WFOE in China, Part 13: What About A Licensing Agreement Instead? appeared first on China Law Blog.

Categories: Chinese IP

How to Avoid China Manufacturing Problems, Part 2: Focus on These Five Things

China Law Blog - Tue, 01/05/2016 - 06:49

When manufacturing  in China, focus first on price, quantity, date of delivery, quality, and payment terms.

In yesterday’s post, the first in this series, we focused on the need to have an OEM Agreement with your Chinese manufacturer. In this post, we focus on what is truly important to include in that agreement, and even more importantly, the terms on which you should reach agreement with your Chinese manufacturer, before you pay a China lawyer to draft your OEM agreement.

In working with companies that are new to OEM manufacturing in China, I find that newcomers too often tend to concern themselves with the “wrong” issues. In my discussions with these companies, the primary issues that seem to be of concern to them are sophisticated legal issues such as ownership of intellectual property and indemnification for potential consumer product liability claims. Though these issues are important, the real issues they are facing in China are oftentimes much more simple and direct.

The key issues in pretty much any OEM manufacturing agreement in China are the following:

  1. Price
  2. Quantity
  3. Date of delivery
  4. Quality
  5. Payment terms

Newcomers to China manufacturing tend to think China is far more advanced that it actually is. In fact, China OEM manufacturing is still dominated by relatively small, privately owned companies that operate on a fairly primitive basis. In fact, many of these companies will openly state that since we are giving you “the China price,” and since that price is so low, we should not be required to care about the other four issues listed above — quantities, delivery dates, quality, and payment terms. When working with this kind of company in China, you should focus on making clear to the Chinese factory that all five of the fundamental manufacturing issues are critical, not just price. Only after you have resolved this with your Chinese factory should you can move on to other more complex issues.

The above five fundamental issues are crucial for business success when purchasing from China. Only very rarely do we see U.S. or European companies that manufacture in China get driven into bankruptcy by an IP infringement or by a consumer lawsuit. However, we have run into quite a few such companies that have been bankrupted by mistakes in dealing with the five fundamental issues set forth above.

What are the standard mistakes?

1.  Price. The buyer will negotiate a very specific price list with the manufacturer, but the manufacturing agreement (a/k/a the OEM Agreement) is written so that the manufacturer is not obligated to accept all purchase orders. So, though the negotiated price list is beneficial to the manufacturer, as soon as the agreed upon pricing works against the Chinese manufacturer, the Chinese manufacturer simply refuses to accept the purchase order and insists on a substantial price increase. When this happens in the middle of a sales season, it can destroy the business of the buyer. Our China attorneys get calls on this every year, not so coincidentally especially as Christmas approaches.

2. Quantity. Chinese manufacturers commonly make short deliveries on purchase orders. If there is no penalty for short delivery, the Chinese manufacturer can make short deliveries with impunity and they will often not hesitate to do so, especially if they have a new customer who is paying more for the same item. In fact, short delivery in some business sectors has become so common as to be predictable and I have Japanese clients who regularly make their purchase orders in quantities 10% to 25% over their needs in anticipation of short delivery. The only way to prevent short delivery is to 1) to provide a severe penalty for short deliveries in your OEM contract and 2) to regularly monitor the production process in the Chinese factory.

3. Date of delivery. Many Chinese manufacturers view the date of delivery on a purchase order as a general form of guidance, rather than as a strict date. So long as the Chinese manufacturer delivers within 2 to 3 months of the delivery date, it feels it is doing just fine. This can of course be a disaster for the U.S. or European buyer who has made delivery date promises to its own customers. The most common situation is a buyer who is purchasing for the holiday season. The delivery date is September 15 and the Chinese factory delivers on December 15. The factory says: we were only 3 months late. What is the problem? We had this situation once with a Christmas tree light company that contacted us in October after learning it would not be getting its two million dollar Christmas tree light order until December. Late deliveries can be particularly bad for foreign buyers who are feeding their product into a “just in time” inventory system. Late delivery means the whole system is affected, often subjecting the foreign buyer to crippling penalties.

4. Quality. Quality problems from Chinese factories are well known. The unfortunate truth is that the issue in general has not been resolved. Consider the following kinds of things that can go wrong, and these are just some of the examples that I personally have had to deal with on behalf of companies that retained us (all after the problems arose):

  • Staples for an automatic nail gun. The staples were beautiful, except they did not fit into the nail gun.
  • Hand blown Christmas tree ornaments. A whole container arrived, delivered on time. The objects were beautiful. The only problem was that the small ring required to hang the ornament from a tree was missing, making the entire shipment useless.
  • Etched glass fixture installed between two sheets of glass in an argon filled custom window. Everything about the window was perfect, except when installed, a very prominent footprint was obvious on the etched glass, rendering the window worthless.
  • Custom door handles. The handles were well made and worked perfectly. However, the surface coating on 30% of the handles was flawed. This required the buyer to open every custom package to individually inspect each item.

All of the above buyers made the same mistakes. They did not inspect the product in China and they paid for the product before they did their inspection in the U.S. They also failed to put clear quality requirements into their manufacturing contract, along with clear penalties against the manufacturer for failing to meet quality benchmarks.

5. Payment Terms. The standard system in China for OEM manufacturing is for the Chinese manufacturer to require a 30% down payment with 70% due on shipment. Most U.S. and European buyers then wait until the product arrives in their country before they do their inspection. This raises an obvious problem for the buyer: when the buyer discovers the problem the Chinese manufacturer has already been paid in full, so it has little to no incentive to deal with the issue. And they usually don’t. Though it is possible to litigate in China to resolve these issues (assuming you have done everything right with your China OEM Agreement to allow for this), Chinese factories understand that the total value of any single container of goods seldom justifies the cost of international litigation, so they simply do not care. The solution to this problem is straight forward: do not make the 70% payment (or any full payment) for the goods until after an inspection has been completed.

Once you the buyer have clear control over these five issues, you can move on to other important issues. But you really should address the above five issues first.

The post How to Avoid China Manufacturing Problems, Part 2: Focus on These Five Things appeared first on China Law Blog.

Categories: Chinese IP

How to Avoid China Manufacturing Problems

China Law Blog - Mon, 01/04/2016 - 05:58

At the beginning of every year, our China lawyers get an influx of emails and phone calls from American and European and Australian companies

This is certainly true of China manufacturing

seeking our help in resolving last year’s bad product or late product problems. We get these calls now because the changing of the year convinces these companies that their Chinese manufacturers really do not have any intention of trying to solve the issues remaining from the previous year.

And at the beginning of every year (and every other month of the year as well), we have to tell them that it probably will not be worth their money to hire my law firm to try to resolve their China product problems after the fact. I then tell them that if they wish to avoid having the same sort of problems in the upcoming year, they need to start conducting business differently with their Chinese suppliers.

If you want to greatly increase your chances of getting good product from China on a timely basis, read and absorb the following:

Probably most importantly, you should also read this post, Register Your China Trademark Or Go Home, on how critical it is for anyone doing any sort of manufacturing in China (even if you are doing no selling there) to register your brand and your logo in China.

It’s sad but true that many of my firm’s best manufacturing clients are those once burned.

 

 

The post How to Avoid China Manufacturing Problems appeared first on China Law Blog.

Categories: Chinese IP

When Going to China, Be Paranoid About Your Data and Your Privacy

China Law Blog - Sun, 01/03/2016 - 17:32

“Paranoia is just having the right information.”
― William S. Burroughs

The lawyer’s job is to discern risk and help their clients to avoid them. Put another way, we are both trained and paid to be paranoid.

When traveling to China, you must protect your data.

Years ago, when I was in Tokyo on a particularly sensitive matter, I left my hotel room as I had done pretty much every day for the last 7-8 days and starting walking to my subway stop. Then for some reason I got a strange feeling about having left my laptop computer in my hotel room and I decided to return. When I did, there were two very well dressed men wearing black suits and ties looking at my turned on laptop. I immediately asked them (in English) what the ____ they were doing in my room and one of them responded in shockingly good English that they were with the hotel and just checking on my internet. To this day, I have little doubt that they were with Japan’s Secret Service.

I just read a lawyer-written article, Privacy Tip #15 – Protecting your privacy during holiday travel, that provides some good tips for maintaining your privacy when you travel. The article lists out the following, with my comments in italics:

  • Don’t leave your laptop, tablet. USB drive, other removable media or mobile phone in your car trunk. I never ever ever put anything in the trunk of a taxi or other car. I take it all with me and put it on the seat.
  • Don’t leave your laptop, tablet or mobile phone unattended on a plane or train. Agreed. In addition to this, you should make sure to constantly remove sensitive data from your devices and store it elsewhere
  • Use complex passwords on all devices so if you forget them or they are stolen, your data is not immediately vulnerable and accessible. This should go without saying.
  • Be careful not to store or leave your devices in the seat pockets of airplanes or trains. This is indeed a good thing to guard against. 
  • Destroy your travel documents (including boarding passes) when you are finished with them by shredding them. I rip mine up in the airplane and give half to the flight attendant and dump the other half in the first garbage can I see upon disembarking.
  • Lock your laptop and other mobile devices in your hotel safe. Hotel safes are not as safe as widely believed. Which is why stripping your devices of confidential information and using complex passwords is always critical.
  • Wipe your laptop before and after you travel to high risk areas such as China, Russia, the Ukraine, Iran or Iraq. Agreed. Just not sure there are any low risk areas. 
  • Use your VPN connection any time you are accessing your company information and not free wifi. Agreed. When I am out of the country, there are certain websites I will not check under any circumstances. I instead request that other lawyers or staff go to those sites for me and report back or I ask them to send me what I need. 
  • Frequently update your virus and firewall protections.  Good idea.

When going to China and to many other countries as well, I assume my hotel room and my phones (including my own cell phone) is bugged and my internet is monitored. I assume the worst and I take every measure I can to be careful. I have plenty of stories to tell involving people who were not careful about their data.

1. Many years ago, I was staying on the business floor of the Hotel Lotte in Pusan, Korea. Back then this floor had a couple of computers for its guests. I got on one of those computers (to read the news) and the first thing that popped up was a letter written by a Seattle company revealing information I know they would not have wanted me (or anyone else) to see. Someone from this company had written this letter on the computer (in Word format) and simply left it there. Not smart.

2. Many times I have gotten on the internet at an airport computer and been let right into someone’s webmail account. Not smart.

3. I once found a memory stick in the desk drawer of my hotel in Shanghai that contained an incredible amount of information on a European plastics company. Another time, on the floor of my hotel room in Los Angeles, I found a USB stick from a leading fashion company, listing out who at the company should be kept and who should be laid off. Not smart.

3. A stockbroker I know was sent an email by a rival stockbroker, urging my stockbroker friend to oppose some proposed law that would strike hard at those with massive net worth. The stockbroker who sent out this email cc’ed it to a half dozen or so of his clients and my friend figured these were people with the requisite massive net worth and he cold-called them for their business. He ended up getting a great client with this tactic. Not smart.

4. Many years ago, a client of ours discovered one of its employees was running a rival business within my client’s business. My client then arranged for this employee to bring his two company laptops to the office and then when the employee went out to lunch, my client locked him out. You would not even believe the stuff we found on those laptops. I am talking both business and personal. Very, very personal. Naked photos with mistress personal. Not smart.

5. Many years ago, I was going to a particular city in a former Communist country and my client and I agreed that, above all else, I should completely avoid meeting with or even talking to “Oleg” [made up name here]. I had to go to this city, but I was going to be there for only two days. I fly in, walk into my hotel lobby and, before I can even check in, two people come up to me and say that Oleg will be coming by to take me to dinner at 7:00 pm. I felt I had to go at that point and when I asked Oleg how he knew of my arrival, he said that he gets emailed the list of all foreigners as soon as they arrive. Oleg runs a very successful private business. The moral of this story is that you should never assume that you can go into a country completely unnoticed.

The New York Times did an article a few years ago, Traveling Light in a Time of Digital Thievery, detailing the steps Kenneth Lieberthal takes before going to China:

He leaves his cellphone and laptop at home and instead brings “loaner” devices, which he erases before he leaves the United States and wipes clean the minute he returns. In China, he disables Bluetooth and Wi-Fi, never lets his phone out of his sight and, in meetings, not only turns off his phone but also removes the battery, for fear his microphone could be turned on remotely. He connects to the Internet only through an encrypted, password-protected channel, and copies and pastes his password from a USB thumb drive. He never types in a password directly, because, he said, “the Chinese are very good at installing key-logging software on your laptop.”

What do you do to protect your data and your privacy when you travel?

 

The post When Going to China, Be Paranoid About Your Data and Your Privacy appeared first on China Law Blog.

Categories: Chinese IP
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