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China Challenges U.S. Antidumping Policies In WTO

Posted in Legal News

The U.S. Trade Representative (“USTR”) announced on Tuesday that China, in a follow-up to its December 3, 2013 request for World Trade Organization (“WTO”) consultations, has asked for a dispute settlement panel concerning certain U.S antidumping methodologies. The USTR requests public comments on the issues identified by China in its panel request.

China challenges certain U.S. antidumping practices in the context of former proceedings on imported products such as coated paper, steel products, and shrimp. Certain of the allegations concern practices specific to antidumping cases involving “non-market economy” or “NME” countries, like China and Vietnam.The United States presumes that all companies in NME countries are subject to the central government’s control such that all of the companies should receive the same antidumping margin. Consequently, NME country companies must first demonstrate that they operate independently from the state before they may receive a separately calculated antidumping rate. The United States calculates these rates using a constructed home market NME price by valuing inputs, labor, and overhead items with prices from a market-economy country. In addition, companies not qualifying for a separate rate in an antidumping proceeding receive the NME country-wide rate.

As used in specific cases, China also alleges that the United States’ application of the “targeted dumping” methodology, and zeroing of dumping margins in “targeted dumping” cases, violates the WTO Agreement. Targeted dumping references the U.S. practice of employing a differential pricing analysis to determine if a pattern of export prices exists in which such prices differ significantly by purchasers, regions, or time periods. If such a pattern is determined to exist, the United States may calculate the antidumping margin by comparing an average of normal value prices to individual export prices. Zeroing in this context would reference the practice in which a Chinese respondent’s individual sales transaction negative margins are deemed zero for the overall antidumping margin calculation instead of including the calculated negative sales margin.

Although China’s WTO challenge is based on specific U.S. antidumping proceedings, it is significant.  A determination that the U.S. antidumping methodologies are inconsistent with U.S. WTO obligations could result in revisions to the U.S. antidumping regulations and the way in which they are administered – specifically with regard to NME proceedings.

U.S. manufacturers and importers involved in, impacted by, or considering future antidumping actions will want to consider submitting comments to USTR to address the issues raised by China. There is a May 2, 2014 deadline for that.

This post was written by Chris Priddy, an international trade lawyer at Harris Moure.  

China Trademarks. Register Them In China Not Madrid.

Posted in Basics of China Business Law, Legal News

Whenever clients ask about filing a trademark in China via the Madrid System, my answer is simple: filing a national application directly with the Chinese Trademark Office (CTMO) is better. Co-blogger Steve Dickinson takes an even stronger position. In his opinion, filing a China trademark via the Madrid System is a waste of time, and he categorically refuses to do it.

The Chinese trademark system is complicated: at once idiosyncratic and highly regimented, and overseen by capricious examiners. But the one-size-fits-all Madrid application elides all of this and makes registering a trademark in China seem easy. Really easy: all you have to do is check a box marked “China.” As a result, Madrid applicants are lulled into a sense of complacency, and all too often the result is a rejection that could have been avoided with a national application in China. Madrid applications are supposed to be cheap and quick, but fixing Madrid problems after the fact is neither. This problem is exacerbated by U.S. lawyers who are comfortable with filing in Madrid but have no experience filing in China.

Trademark prosecution in China is highly mechanical; for the vast majority of applications, you file an application, wait 18 months, and at the end of that time your trademark is either registered or rejected. (A slight oversimplification, but not by much.) There is no CTMO equivalent to a USPTO office action, no back-and-forth with trademark examiners, and no chance to amend an application that has been filed.

For this reason, the meaningful work for Chinese trademark applications occurs before the application is filed.

First of all, it is essential to conduct a pre-application trademark clearance (a.k.a. a trademark screening) to assess the trademark’s registrability. Is the mark inherently distinctive? Does it run afoul of China’s statutory prohibitions on trademarks? Does it conflict with any preexisting trademarks?

Next, assuming the screening results don’t scare you away, you must determine which class(es) to file in and the specific products or services (“items”) to be covered by the mark. This is a lot trickier than it sounds because the CTMO divides each Nice class into a unique system of subclasses. For purposes of trademark registration, each subclass is treated discretely: a trademark for one item in a given subclass covers all items in that subclass, but is not effective on items in any other subclass.

To see how this works, let’s look at Nice Class 41, for which the official heading is “Education; providing of training; entertainment; sporting and cultural activities.” The CTMO divides Class 41 into seven different subclasses:

Subclass 4101 – education

Subclass 4102 – organizing educational, cultural, and recreational activities

Subclass 4103 – library services

Subclass 4104 – publishing services

Subclass 4105 – sports and entertainment services

Subclass 4106 – animal training

Subclass 4107 – otherwise uncategorized services.

Because Class 41 has seven subclasses, that means that seven identical trademarks, each held by a different entity, could theoretically coexist in Class 41. To show how this can work, I did a search of the trademarks in Class 41 for “MGM” and found that four different entities have filed applications:

(1) Marilyn Licensing Corp. has registered “MGM” in subclass 4107;

(2) A Chinese company, Great Wall International Communication Co. Ltd, has registered “MGM” in subclasses 4102 and 4104;

(3) Metro-Goldwyn Mayer Lion Corp. has registered “MGM” in subclasses 4101 and 4105, and (needlessly) again in subclass 4105; and

(4) MGM Resorts International has attempted to register “MGM” in all seven subclasses, but will almost certainly be rejected in all but subclasses 4103 and 4106 because of the conflicting prior registrations.

When you file a China national application, you determine the subclasses that you want your application to cover. But when you file a Madrid application, your list of items goes straight to a CTMO trademark examiner, who will decide from your list which subclasses the items should go in without consulting you. This lack of consultation, combined with the examiners’ often-tenuous grasp of English (or French or Spanish), means that imprecise descriptions of items can lead to problems of both overinclusiveness and underinclusiveness.

The application filed by MGM Resorts International was overinclusive because it attempted to cover all of the services in the class when most of the subclasses were already taken. But it could have been worse: it could have been a Madrid application. Because MGM Resorts filed a national application, it will only be rejected with respect to services in subclass 4101, 4102, 4104, 4105, and 4107. If it had been a Madrid application with an overly broad description of services, the CTMO examiner could have decided that the services covered all subclasses, and then the entire application would have been rejected.

Surprisingly, attempting to cover all items in a class can also result in underinclusiveness. We see this most often with a description of items that mirrors the official Nice class headings – because the official Nice class heading usually only covers some of the subclasses for that class. For instance, the official Nice heading for Class 25 products is “clothing, hats, and shoes.” If you filed a Madrid application with that description of products, you might think that your trademark would cover all products in Class 25, but in fact your trademark would not have any protection for socks, scarves, gloves, or belts. According to the Chinese subclass system, none of those are considered “clothing.” This sort of mistake is quite commonly made by trademark lawyers not familiar with China’s trademark system.

Apple Computer famously ran afoul of the “underinclusive” problem when it registered a Class 9 trademark for “IPHONE” in 2002 as covering computer hardware and computer software. Unfortunately for Apple, cellphones were in a different subclass, and in 2004 a Chinese company, Hanwang Technology, registered “I-PHONE” to cover cellphones. Because iPhone was not a famous trademark in China in 2004, Apple had to pay off Hanwang to gain ownership of the trademark.

It is possible to perform a pre-application screening before filing a Madrid application, and it is possible to craft a description of items in a Madrid application that will conform to the Chinese subclass system. But this requires working with an experienced China trademark attorney or agent, and it will cost nearly as much and take nearly as much time as a national application. In other words, you lose all of the advantages of the Madrid System, but keep all of the disadvantages.

Finally, even if your Madrid System trademark is registered in China without a hitch, you may still have trouble enforcing your rights. Upon registration, the only formal certificate for Madrid System trademarks is the one issued by WIPO. China does not issue its own separate trademark certificate. In theory, this should not be a problem, because the WIPO certificate should be sufficient to enforce your trademark rights under Chinese law. In practice – and I realize this may come as a shock to some readers – Chinese bureaucrats and e-commerce customer service reps generally could care less about China’s WTO obligations. Much of the time, before they will lift a finger against an infringing factory or website, they will demand a copy of a CTMO-issued Chinese trademark certificate. It is easy enough to request a Chinese trademark certificate based on a WIPO registration, but it takes another three to five months to get one. That can feel like an eternity when your trademark is being knocked off.

If a client has an extremely precise and limited list of items and is already filing a Madrid application for a number of countries, then I might consider adding China to that list. But for the majority of clients, I agree with Steve. The CTMO is fickle enough with national applications. Why make things more difficult by filing a Madrid System application?

China Design Patents. Because They Work.

Posted in Legal News

In 2012, the last year for which statistics are available, 657,582 design patent applications were filed in China – more than in any other nation in the world. In fact, more design patent applications were filed in China than in the rest of the top 20 jurisdictions combined. But only a paltry 2.3% of the design patent applications in China were filed by non-Chinese entities. These statistics, and the fact that vast numbers of foreign companies manufacture and/or sell products in China, lead to two fairly obvious conclusions:

  • Chinese companies are taking advantage of China’s legal IP protections for product design.
  • Foreign companies are not.

Two comments about the above statistics (which are from WIPO). First, Chinese WFOEs and JVs are considered Chinese entities, but even if they were reclassified as non-Chinese entities, the numbers would not change appreciably. A quick search on China’s State Intellectual Property Office (SIPO) website revealed the following:

  • Motorola: 635 of 653 design patents have been filed in the name of the American parent company.
  • Ricoh: 135 of 172 design patents have been filed in the name of the Japanese parent company.
  • Fuji Xerox:  23 of 24 design patents have been filed in the name of the Japanese parent company.
  • Unilever:  352 of 360 design patents have been filed in the name of the Dutch parent company.

Second, a certain number of China design patent applications (especially at the end of the year) are filed to meet an artificial quota. Mark Allen Cohen’s China IPR blog has done a nice job of tracking this phenomenon. Without extensive analysis, it is difficult to know how much the numbers are skewed, but even if half of the filings were bogus, the point would remain the same: Chinese companies are filing vastly more design patents in China than foreign companies.

We have written a number of times about the need to register intellectual property in China with the appropriate authorities. And we have placed particular emphasis on registering trademarks in China, because doing so is an easy, obvious, and relatively economical first step in IP protection. But for those selling or manufacturing products in China, the analysis should not end there.

A design patent in China (generally analogous to a design patent in the U.S. or a Community design in the EU) covers novel product designs that (1) incorporate shapes, patterns, and/or colors, (2) are rich in aesthetic appeal, and (3) are fit for industrial application. It does not take much for a design to meet this standard. China does not even conduct a substantive examination of design patent applications. Such examinations only occur if a third party challenges a patent’s validity after registration. A design patent applicant need only submit an application to SIPO that satisfies the procedural requirements, particularly with respect to proper formatting of documents and drawings.

Does this mean many of the design patents in China are slight modifications (read: ripoffs) of existing product designs? Of course. But this cuts both ways. A foreign company deciding to enter the Chinese market would not be able to register a design patent for its own product that has already been on the market for five years, but it could add a twist (“Chinese characteristics,” if you must) and thereby make the design patentable. Since 2009, the rule in China for patents has been absolute novelty – that is, disclosure anywhere in the world will negate novelty and make a design unpatentable. Before 2009, the rule was novelty in China.

A registered design patent has serious value: its owner can sue for design infringement, and, perhaps more importantly, its owner can also register the patent with Chinese Customs and have counterfeit or copycat products seized at the border. Even if a company does not think its design is novel enough to be patented, there is a first mover advantage to filing, in that design patents are valid until successfully challenged by a third party.

If you make an arguably generic product, would you rather hold a presumptively enforceable design patent on that product, or allow one of your competitors to do so? Bamboo mat manufacturers found out the answer to this the hard way. The China lawyers at my firm have consistently been able to secure license payments from Chinese manufacturers that were infringing on our clients’ design patents by writing cease and desist letters and then instituting negotiations. These manufacturers chose to pay a licensing fee rather than contest the validity of the patent.

Chinese companies don’t like to waste money any more than foreign companies. By filing for design patents in such numbers, Chinese companies are recognizing the value in registration. Any foreign company that cares about protecting its design in China should follow suit and file for its own China design patent. Because they work.

Bottom Line: If you are selling your product in China or having your product manufactured there, you should consider applying for a China design patent.

Selling Your Product Or Services Into China. These Are Your Twenty Cities.

Posted in Uncategorized

In a post entitled, Map: Half of China’s GDP Comes From Major Cities Tea Leaf Nation uses a Foreign Policy map to graphically (both literally and figuratively) show “how much China’s GDP growth machine depends on a few regions.” Its post also sets out China’s leading twenty cities in terms of contribution to GDP. All of the twenty cities below contribute 1% or more to China’s GDP:

  1.  Shanghai (3.80 percent)
  2. Beijing (3.43 percent)
  3. Guangzhou (2.71 percent)
  4. Shenzhen (2.55 percent)
  5. Tianjin (2.53 percent)
  6. Suzhou (2.29 percent)
  7. Chongqing (2.22 percent)
  8. Chengdu (1.60 percent)
  9. Wuhan (1.59 percent)
  10. Hangzhou (1.47 percent)
  11. Wuxi (1.42 percent)
  12. Nanjing (1.41 percent)
  13. Qingdao (1.41 percent)
  14. Dalian (1.34 percent)
  15. Shenyang (1.27 percent)
  16. Changsha (1.26 percent)
  17. Ningbo (1.25 percent)
  18. Foshan (1.23 percent)
  19. Zhengzhou (1.09 percent)
  20. Tangshan (1.08 percent)

Makes for a pretty good roadmap for foreign companies looking to do business in China.

China Expats Gone Bad. A Review Of Unsavory Elements.

Posted in Uncategorized

We are constantly barraged with emails from book publishers asking that we review their books on China. These emails usually ask whether they should send us the book and my usual response is usually, “sure, but we make no promises that we will ever read it or review it.”

Many months ago we received such an email regarding the book Unsavory Elements, a collection of expat accounts of living and playing in China. Amazon quite accurately describes this book as follows:

Westerners are flocking to China in increasing numbers to chase their dreams even as Chinese emigrants seek their own dreams abroad. Life as an outsider in China has many sides to it – weird, fascinating and appalling, or sometimes all together. We asked foreigners who live or have lived in China for a significant period to tell us a story of their experiences and these 28 contributions resulted. It’s all about living, learning and loving in a land unlike any other in the world.

Anyway, to make a long story about a book of short stories short, I read about half of the book and really liked it, but was having trouble finding time to read the rest of it and to review it.

Enter Christopher Cottrell. Chris has been living in China since 2003 and he has written on China for the Associated Press, Boston Globe, CNN, Fodor’s, Los Angeles Times, and South China Morning Post. He also launched That’s PRD in 2006 and edited the book Macau 2002-2012: 10-years of Gaming Success. Most importantly, Christopher has written the book review I had been meaning to write and his review follows.

 

Pouring over Unsavory Elements, an anthology of true stories about foreigners “on the loose” in China, readers of China Law Blog might be impressed not just by the high name recognition of its best-selling cast of contributors, but with the sheer levels of illegality and ethics it probes.

The authors and journalists who participated in this book of expat essays did not set out to write about impropriety in Chinese law. They simply wanted to tell their tales of some of the more colorful or trying moments that they experienced while living in China over the past decade.

Ranging from transactions and deeds that would raise the eyebrows of those enforcing America’s Foreign Corrupt Practices Act to stints in prison for drug dealing to flagrant violations of prostitution laws, what results is 300 pages of business and law school case studies written not in legalese but in literary prose, and what a read it is.

“What do we take away from this theme of foreigners who go to China only to become corrupted in a short time span?” Tom Carter, the editor of Unsavory Elements, discussed all this in a recent interview:

While it may appear to anyone perusing the pages of this book that these are simply chronicles of corruptible Caucasians in China, I’d hope that readers would glean a deeper cultural subtext, whereby we the writers are struggling to adapt in a pseudo-socialist society where laws are notoriously fluid; where invariably the only way to survive is to set aside our own Western black-and-white concepts of morality and ethics and learn to navigate the vague China Gray.

Indeed, one might take special note of the chapter “Playing in the Gray” by Graham Earnshaw, of the eponymous Earnshaw Books, publisher of Unsavory Elements and of the Shanghai Buzz weekly, the first foreign owned and operated publication in China since the founding of the PRC.

As Earnshaw explains:

For venues and marketing companies, Buzz represented an entirely new channel for contacting the market, and it worked well. So well, in fact, that one state publication in Shanghai, the Shanghai Star, started to feel threatened. They presumably tapped into their guanxi with the Shanghai government’s news and publications department, but, for a time, nothing happened. This was partly due to the puzzlement on the part of the communist officials, and partly due to a contretemps in progress at the time between the Shanghai propaganda authorities and Beijing-controlled China Daily, both eager to control the only official English newspaper in the city. Due in large part to the non-confrontational way in which (we) dealt with the Publication Bureau, and the way in which the Buzz content never overstepped any sensitive lines, we were never fined for having published an illegal publication in China, although we had of course broken every relevant law.

Earnshaw soon found a competitor, “In Shanghai,” founded by fellow British expatriate Mark Kitto (who also contributed to Unsavory Elements) and restaurateur Kathleen Lau. In Shanghai later became That’s Shanghai magazine, which went on to garner notoriety after it was wrested away from Kitto by State-owned media agencies. Kitto’s experiences have been chronicled on China Law Blog and elsewhere, but Earnshaw’s chapter in Unsavory Elements is seminal to understanding how foreign media began flourishing in China.

And if Earnshaw’s publishing experiences define China’s 5,000 shades of gray, editor Tom Carter profoundly illustrates Chinese culture’s darkest shades of pink. Mr. Carter is best known for his critically acclaimed book of photography CHINA: Portrait of a People, [Editor's Note: an absolutely gorgeous book] but his controversial essay in Unsavory Elements pertains largely to the seamy underbelly of prostitution.

Under Chinese criminal law, prostitution is technically illegal, though the U.S. State Department estimates upwards of 6 million women across China engage in this occupation.

Mr. Carter elaborates:

Pretty peasants looking to make easy money migrate to China’s major metropolises to work at karaoke parlors or massage parlors. Their plain-of-face counterparts in the countryside, however, are consigned to bottom-tier brothels, such as the ones my friends and I were standing in.

According to his essay, Mr. Carter escorted a companion, from Kenya, to a rural brothel staffed by teenagers. In raw and provocative prose unfit for quoting on China Law Blog, he describes the illicit offerings there.

Statistics show that crackdowns on China’s brothel buffet culture, including the most recent high-profile campaign in Dongguan in February 2014, do little to dissuade single men from patronizing prostitutes, but have they dampened the use of young Chinese women for business purposes?

Not if one reads Susie Gordon’s essay “Empty from the Outside.” This young English journalist arrived in China in 2008 and has been covering China’s business culture for local media. She is one of the newer voices this collection presents, and her expose in Unsavory Elements about the excesses of her wealthy business partner’s second-generation “fu er dai” sons, is a highlight of the book.

After China joined the WTO in 2001 and won its chance to hold the Olympics, the country witnessed a huge influx of foreigners and FDI. Many were businessmen and many were taken by their Chinese hosts to KTV (karaoke) to negotiate lucrative contracts in the persuasive company of prostitutes. Ms. Gordon writes:

He had two of the girls bring in a magnum of champagne, a little silver tray with slim white lines of powder that might have been coke but in all likelihood was ketamine, and pills nestled like candies in a brass bowl. At one point, I remember looking around at the girls, the men, the drugs, and the money, and wondering how long this utopia could last: the Chinese dream, in its second, prodigal generation.”

How long indeed. In the fall of 2013, Xi Jinping unleashed an unprecedented anti-corruption campaign that has resulted in the prosecution of some very high profile individuals and companies.

How, then, does one find transparency in China’s business and legal culture? And more specifically, how do foreigners side-step being brought along to brothels, or just say no to the narcotics in front of them, when doing business with the Chinese without wholly insulting their overly gracious (and easily offended) hosts?

These are looming questions that, unfortunately, the authors of Unsavory Elements do not attempt to answer. They simply present the rough and tumble experiences they have gone through as China has risen economically in the past decade. This book fundamentally underscores the variety of unseen personal risks foreigners in China start facing the moment they enter China.

China Patents And Trademarks. Close The Barn Door Before The Pigs Are Gone.

Posted in Basics of China Business Law, Legal News

Sorry for the farm analogy, but I just finished looking at my itinerary for an upcoming Iowa trip.

Got a call the other day from a U.S. company furious about a competitor in China who had registered both its trademark and its patent in China.

How’s that you say?

Let me explain.

This U.S. company had just started doing business in China when one of its competitors (a European company, BTW, not a Chinese company) sent the U.S. company a cease and desist letter saying that the U.S. Company was infringing on both the European company’s trademark and patent in China.

This did not sit too well with the U.S. company because the patent on which it was allegedly infringing in China was the same as a patent the U.S. company had in the United States and the same held true of its trademark. I was in the midst of trying to resolve a client crisis when this company called and in no mood to discuss the finer points of China IP law with them so I suggested that they go back to their US patent and trademark attorneys (two different law firms I learned) and talk with them about next steps.

What did this U.S. company do wrong so as to allow itself to be in this horrible predicament and what can it do now to try to resolve it? I will answer the second question first because that is in many ways the less important one.

If it is going to have any chance of getting “its” trademark and “its” patent back in China, this U.S. company is going to need to pursue various actions in China to try to do so. On the trademark front, I am guessing (guessing because I do not have the facts to know for certain) that its best claims will be that the European company secured the trademark in bad faith (these are very tough claims) and/or that the European company must relinquish the trademark for non-use. On the patent front (and again I am guessing because the U.S. company was not clear on what sort of patent we were even talking about), its best claim will likely be that the European company’s patent should not have been granted because it lacked novelty.

The more important question is what should this U.S. company have done to have avoided the complicated and no doubt expensive situation in which it now finds itself? It should have filed for its own trademark and patent in China before its European competitor did.

We wrote about this many years ago in Getting A Patent In China. The China Patent Shuffle:

 

Kelly Spors, the Wall Street Journal’s spot on Q&A columnist on entrepreneurship and small business answered a question today on securing a China patent.

The question asked of Ms. Spors by a U.S. patent holder is whether it is “worth spending the money for a patent in China to prevent knockoffs from being made there?”

Ms. Spors says probably yes.

She starts out by noting that given “China’s reputation for meagerly enforcing intellectual property rights, getting a patent there may seem like a pointless expense. But you may kick yourself later on if you don’t.”

She then rightfully notes that in spite of the problems companies have in enforcing their patents in China, they are sometimes critical to prevent others from patenting YOUR product:

The big risk: If another company patents your idea first, it can turn around and sue you for infringement. It isn’t as much about “getting a patent in China as preventing other people from getting one,” says Siva Yam, president of the U.S.-China Chamber of Commerce, a Chicago-based organization that helps businesses navigate China. Mr. Yam says the Chinese government is trying to better enforce patents, so having a Chinese patent may be worth more in the future.

Mr. Yam recalls a few years back when a Pennsylvania company decided not to seek a patent in China since it was already selling the technology there. But a Chinese company later sought and received a patent on a similar technology and then sued the U.S. company, along with writing letters to its customers threatening to sue if they continued doing business with the firm. The Chinese company eventually backed down, but not before the U.S. company had spent ample time and money fending off the claims.

She says it also makes sense to get a Chinese patent if you are selling your product into the Chinese market and that a “patent will allow you to fight back if the manufacturer starts selling knockoffs of your product.” She then notes that if you are going to seek a China patent of that which you have already patented in the United States, you must do so within a year of filing your U.S. patent application, unless you get an extension by filing an international patent application.

She is absolutely right about this. The China lawyers at my firm have received countless phone calls from companies agonizing over whether or not to get a China patent until we end that particular agony by telling them that they are too late.

I am probably a bit less upbeat than Ms. Spoor on the benefits of securing a China patent because they do tend to be difficult to enforce in China. One of the Chinese lawyers with whom we regularly work is even of the view that getting a strong trademark and constantly updating your product militate against the need to get a patent most of the time. But this ignores the problem of someone else stepping in and registering “your” patent in China.

Though we are constantly seeing instances where Chinese companies swoop in and register someone’s US trademark in China, it is less common with patents and I think this is because it is generally considerably more complicated and expensive to register a patent than it is to register a trademark.

Bottom Line: f you are doing business in China or even just considering doing so, you should be looking now at what you can do to protect your IP (patents, trademarks, copyrights, trade secrets, etc.) in China.

China Law Blog Events This Month

Posted in Basics of China Business Law, Events

I will be speaking on China law twice this month and Mathew Alderson, our China entertainment lawyer, will be moderating a very important China film event this month as well.

I will first be speaking in Seattle on April 11, starting at 2:55 at a King County Bar Association CLE. My talk is entitled “China Law Basics.” My main goal in this talk before almost exclusively lawyers is to convince them that China law is not as similar to Seattle law as they probably think.

Then it will be Mathew Alderson’s turn, as he on Friday, April 18, will be moderating an AmCham event, Big Screen, Big Markets: US-China Relations in the Film Business, taking place from 8:00 to 10:00 a.m. at the China World Hotel in Beijing. AmCham describes this event as follows:

Speaker: Chris Dodd, Former United States Senator and Chairman and Chief Executive Officer of the Motion Picture Association of America

Moderator: Mathew Alderson, the co-chair of the AmCham China Media & Entertainment Forum.

AmCham China’s Media & Entertainment Forum and The Motion Picture Association of America invite you to attend an exclusive briefing with former United States Senator Chris Dodd during the Beijing International Film Festival.

As the chairman and chief executive officer of the Motion Picture Association of America, Senator Chris Dodd serves as the voice and advocate of the American motion picture industry around the world.

Senator Dodd’s highest priority is to champion the creative freedoms of filmmakers by safeguarding intellectual property rights, advancing technology-driven innovation and opening global markets to the uniquely powerful medium of film.

Senator Dodd also served as a senior member of the Senate Foreign Relations Committee and is a recognized expert on Latin America. During his tenure he interacted extensively with leaders throughout Europe, Asia, Canada and Latin America. Senator Dodd will give us a unique insight into US-China relations in the film business.

I then head to Washington D.C. where on Wednesday, April 23, I will be a panelist at the Dow Jones Global Compliance Symposium.  My panel is on “China: Making Sense of the New Bribery Crackdown” and it will run from 10:10 am until 10:50 am.  It is described as follows:

China’s anti-corruption campaign has highlighted risks for Western companies in their choice of business partners and hires and how they monitor third parties. Our panel of experts will apply their expertise from working in China to take the temperature of the nation’s business environment and how companies should approach it.

We hope to see you there….

Selling Your Product In China Through A China Distributor. Easy-Peasy.

Posted in China Business

For years now, we have been extolling the virtues of American and other foreign companies selling their products into China through distributors. Not saying that is the only way or even the best way to do that for many companies, but I am saying that it is increasingly a very good and relatively easy way to profit from China without having to incur the time and expense of setting up a company there.

For our prior posts on this topic, check out the following:

This post focuses on how to find the right distributor for your China product, something which is easier said than done.

In my experience and that of the other China lawyers at my firm, the best China distributors typically share the following characteristics:

  • They are relatively new companies, having been formed in the last 15 years.
  • They are privately-owned
  • They focus on a particular region of China
  • They have achieved success with their own products, similar to that which you are seeking to sell into China

In other words, they are the exact sort of company that is not the least bit desperate about partnering with a foreign company. That being said, how do you find these sorts of companies and convince them to take on and sell your product?

My cop out answer on finding the right China distributor is that you hire the right China consultant to find eligible companies. Alternatively, you figure out the China market for your product and/or similar products and you see who is already succeeding at it.

You convince them to market and sell your product by having a product that can do well in China and by setting up a relationship with the distributor that will allow it to do well by selling your product. The good news is that China distribution contracts are quite similar to U.S. distribution contracts as the core of any product distribution business is the same. The distributor wants to know that if it spends the time and money required to succeed at marketing and selling the product, it will garner a substantial share of the profits from that.

Go forth and prosper.

Four Common China Law Mistakes To Avoid

Posted in Basics of China Business Law, Legal News

I am now writing weekly on China law issues for the Above the Law Blog. In my first post, China Law Mistakes To Avoid — I’m Talking To You, I listed out “four common and egregious mistakes my law firm’s China lawyers often see American domestic lawyers make when representing their clients in doing business with or in China, along with a very brief analysis of what causes American lawyers to make each sort of mistake.”

Those four mistakes are as follows:

1. Many years ago, a lawyer in the Midwest called us to discuss his client’s desire to form a company in China. This lawyer did not even tell us that his client was in the room. The lawyer asked us the minimum capital the Chinese government would likely require his client put into a Chinese bank to be able to start a business (a WFOE) in China. Based on the nature and size of the business, we estimated $6 to $8 million. The lawyer asked us to confirm that a portion of the required $6 to $8 million could come from factory equipment not cash, and we assured him that it could. At that point, he said, “good,” because his client had already purchased $5 million in equipment and shipped it to China.

We then had to tell him those equipment purchases could not count because they had not been previously designated as going to the WFOE. The lawyer then complained about how his client could not afford to come up with another $5 million and how China was putting form over substance. To which we could say little more than, “yeah”…

This is just one of countless instances where an American lawyer has done poorly by his or her client by just assuming that the rest of the world views the law just as we do. China almost always places form over substance and it does that because it views giving its bureaucrats discretionary authority as also giving them the discretion to solicit bribes to influence the exercise of that discretion.

2. A lawyer calls us with an airtight $2 million dollar breach of contract lawsuit against a Chinese company. This lawyer had drafted a contract calling for disputes between her client and the Chinese counter-party to be resolved in Boston Federal Court and she had already sued the Chinese company in Boston and secured a default judgment against it. She was now seeking my law firm’s help in domesticating the judgment in China, and It was clear she expected us to jump at the opportunity to take the case on a contingency fee basis.

That is until we told her that China does not enforce U.S. judgments. Ever.

She then came up with the idea that we start all over by suing the Chinese company again in China. We had to tell her that could not work because the Chinese court would have two strong grounds for throwing out that lawsuit. First, improper jurisdiction because the contract clearly called for the lawsuit to be in Boston. Second, res judicata because the entire case had already been tried (and won) in Boston (the proper jurisdiction). I have no idea how she explained all this to her client.

American lawyers commonly assume that what makes sense for a domestic transaction necessarily also makes sense for an international transaction. Boston would have made sense in the above instance if the counter-party had been in Los Angeles, but the rules and the issues are different when doing business internationally.

3.  Lawyers often call us for “tips” on handling an arbitration in China (usually with CIETAC). We always quickly ask whether the contract calls for the arbitration to be in English or whether the lawyer calling us (or some other lawyer) on the case is fluent in Chinese. This virtually always elicits a really long silence and then they say something about how they had just assumed that their case (usually set for hearing in a month or two) would be in English.

If you do not specify that your China arbitration is going to be in a language other than Chinese, it will be in Chinese. This mistake stems from the American lawyer’s inability to grasp that China is not all that different from the rest of the world. I mean, would anyone ever think that an arbitration in Kansas City is going to be in Chinese even though the contract calling for arbitration there is silent on the language of the arbitration?

4. American lawyers often call us on behalf of their client who has received a product from their Chinese manufacturer, claiming that the product does not meet the contract specified quality. We then determine that the specified quality to which they are referring is “reasonably good quality” in such and such industry. To their surprise, we immediately beg off working on the case and we then have to tell them how there really is no such thing as “reasonably good quality” in a country where you can buy a 30 cent t-shirt that falls apart after its first washing. And/or we tell them of the U.S. company that had us call a Chinese factory from whom the U.S. company received a million dollars worth of laptop bags whose handles were not strong enough to hold a laptop. The Chinese factory’s explanation was that if our client had wanted laptop bags strong enough to truly hold a laptop, our client should have ordered the $6 bags, not the $3 ones.

This mistake stems from the American lawyers’ belief that the U.S. way of looking at the law applies universally, when it does not. China is a civil law country and a phrase like “reasonably good quality” is almost meaningless.

What have you seen out there?

How To Handle Chinese Negotiating Tactics. Part Five.

Posted in China Business

It is not unusual when China lawyers get together to talk about Chinese company negotiating techniques. It also is not unusual for at least one person to describe them as inscrutable. In an effort to make them more scrutable (that is actually a word, BTW), we bring you part Five of our series on How to Handle Chinese Negotiating Tactics. Part one is here, part two is here, part three is here, and part four is here.

This part 5 is based on a post by my friend Andrew Hupert, entitled, Negotiating with Chinese in your Home Market, and though it is tilted towards negotiating with Chinese citizens seeking to purchase a house in the United States, its five tips for better negotiating (set forth below with my comments in bold) have some relevance to any sort of deal with a Chinese company, particularly those involving the Chinese company seeking to do a deal in the U.S.

1. Get the lawyers and bankers out of the room in the early stages. Americans tend to lead with the contractual details and legalese. Chinese in the US aren’t as relationship-oriented as they are back in the mainland, but it’s still intimidating and off-putting to them. Relationships lead to transactions. I agree, which is why our China lawyers usually advise our clients not to have us in the room for early stage negotiating. Chinese companies do use lawyers on bigger deals and you too should have your own China attorney working for you as well but it does generally make sense to keep him or her in the background.

2. Don’t ask where the money comes from (until you have to). Due diligence is important, and you will have to check out your Chinese counter-party when transacting in the North America or Europe. But tread carefully on the “sources of income” issue. A lot of the money showing up to buy US real estate and high-value assets comes from corruption or money transfers that bend or break PRC capital control laws. When the counter-party is from mainland China, you have to find other ways to qualify buyers, and put off the due diligence until later. Very true. 

3. If there are kids involved, it’s all about education. If you are involved in real estate, then know your schools. Good public schools in the neighborhood a huge plus – since mainland Chinese are the last known people on earth to respect the US education system. Know the stats, be familiar with extracurricular options and have detailed info on private and public options in the neighborhood. Don’t worry so much about parks, recreational and athletic facilities. Even if the kids plan on making use of them, the parents still feel they gain face if their kids look like studiholics. In The Chinese Are Coming, Part XII. To A Public School Near You, we wrote about how a U.S. education can be a big factor in whether or not a deal gets done.

4.  They see themselves as international elite but still want access to Chinese stuff. Don’t go too heavy on the Chinese culture available in the area. Mainlanders with money see themselves as part of the global elite, so their buttons are aspirational purchases and acceptance by the dominant group. They respond to “you are joining the 1% status” much more than they do to “familiar Chinese masses in Manhattan.” Your job is to know where other Chinese 1% shop and access familiar services (particularly if they are traveling or living with elderly parents), but spend your time talking about the European and Ivy League neighbors and colleagues. Good cultural tip, overall.

5. Be a real American. When Japanese money came to the US in the 80s, all the brokers and headhunters took Japanese lessons and treated their counter-parties like trauma victims who would were about to break down from terminal culture shock. Chinese clients and buyers aren’t like that. They know they’re overseas, and probably worked hard to get here. When Westerners pretend to be Chinese, they dilute their value and risk embarrassment. Chinese clients come from a society where insider knowledge and connections are tied to success and effectiveness. When you are competing with an American-Chinese or mainland Chinese agent or salesman, your advantage is that you are a “real American” and can steer your mainland client through this strange and hostile market environment. Very good advice.

What do you think?  More tips?