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China Law for Business

China Legal Advice And The Role Of The “Grapevine”

Posted in Legal News

Every so often I go deep into the backend of this blog to review and delete the draft blog posts (some little more than an idea) that have yet to see the light of the Internet page, and shouldn’t.

I did that today and came across a post on a great article Phil Taylor (now a solicitor trainee at Eversheds), wrote for the International Bar Association, entitled, Asia: Adopting the Right Mindset. The article talks about how and when lawyers should and do consider “factors beyond the letter of the law” in advising their clients. I strongly urge you to read the entire article.

This article touches on how lawyers can best advise their clients regarding the legal issues they will face by doing business in a country where the law is unclear and/or constantly changing and/or where enforcement is spotty. Just about all countries qualify on some counts to some extent, but some countries are clearly less legalisitic than others. Phil extensively interviewed me regarding China legal advice and wrote the following about how our China lawyers typically interpret China’s laws:

In countries where the law is developing rapidly, new regulations can appear almost overnight. When this happens, experienced lawyers will look at how the authorities have enforced similar laws in the past to assess the actual risks to their client. A few years ago, for example, the Chinese government announced it was making all internet-to-internet telephony illegal. But believing that China’s public would never allow such a crackdown and therefore that it would never happen, Harris says he did not advise his clients not to talk on Skype.”They [the Chinese government] just threw it out there to see what would happen,” he says. “In this kind of situation we tell them what the law is, then we talk about our experience – and often we’ll say give us a couple of days and we’ll try to find out what’s going on.”

“You can’t rely as much on the law as it’s written – that doesn’t mean you can just ignore the law. There’s a grapevine among China lawyers: you call your lawyer friends, even if you’re sure what the law is, and ask them what they’ve been hearing,” Harris continues. “I’m happiest when the law and the grapevine say the same thing.”

*    *    *    *

An issue that can arise when helping a client form a company [typically a WFOE] in China is whether the investor can do any kind of business in the country before the company is fully set up. Although it is technically illegal to do so, many carry out some initial scoping work in the interim period. But if they are caught, Harris says, the authorities tend to take a pragmatic approach, and the investor will rarely suffer any consequences if the authorities know that a genuine company registration is pending. Experienced lawyers will explain this precedent to their clients, clarifying that this is no guarantee as to what may happen in the future and leaving it up to them to make the final risk assessment.

I have nothing to add to the above, but I would certainly love to hear how other lawyers deal with these issues.

China Company Indemnification From Product Defects. Yeah, Whatever.

Posted in Legal News

American lawyers love using indemnification provisions in product manufacturing agreements. They love them so much that they often use them in China manufacturing contracts (OEM Agreements) even though they do not work well at all there.

American lawyers often put in a provision stating that if there is a product recall, the Chinese company must indemnify the American company for any fees/costs/damages incurred by the American company arising from the recall. American lawyers also often put in a provision stating that if anyone is injured by a product defect, the Chinese company must indemnify the American company for any fees/costs/damages incurred by the American company arising from the defect.

These sorts of provisions sound so good and so safe. The only problem is that they aren’t.

If a Chinese manufacturing company breaches a contract in a way that damages the American buyer, then in principle the Chinese side is liable for all damages that flow directly from such a breach. This includes the types of damages in normal indemnity provisions. It is therefore usually unnecessary to include indemnity provisions in contracts that will be enforced in China using Chinese law. For why it usually makes sense to have your manufacturing contract be enforced in China, check out China OEM Agreements. Why Ours Are In Chinese. Flat Out.

American companies are quite reasonably concerned that if their Chinese manufacturer provides them with defective products they (the American companies) could suffer liability for damages in amounts much greater than the purchase price of the product. In that situation, a claim against the Chinese manufacturer for a refund of the product price or a repair or replacement of the products is not going to come close to being sufficient to cover the damages incurred. This is very real risk in purchasing products from China.

The problem though is that you cannot expect to get a Chinese court to find a Chinese company liable for such damages. Foreign judges generally — and Chinese judges in particular — think that American courts are out of control with the damages they impose in product liability cases. So even when a Chinese manufacturer has clearly breached its contract (lead paint in children’s toys for example), Chinese courts and Chinese arbitrators typically limit the damage award to nothing more that the direct cost: a refund, a repair or a replacement, plus maybe reimbursement of penalties imposed against the American company for something like a late delivery. Chinese courts and Chinese arbitrators almost never will enter an award covering losses from product liability claims, whether those claims are made by consumers or by a government.

Usually, the best way for American companies to protect themselves from product liability and product recall claims is by securing the right insurance, with the premium costs viewed as part of the cost of doing business in China. You can try to get your Chinese manufacturer to pay your insurance premiums, but in our experience few Chinese manufacturers will agree to this and those that do will somehow raise their product pricing to cover it.

Sorry, indemnification lovers….

China Employment Contracts: Do Not Try This At Home, Part II

Posted in Basics of China Business Law, Legal News

Did a post yesterday explaining why I got so upset with the idea of an American domestic lawyer writing the employment contracts for his company’s China WFOE. That post, China Employment Contracts: Do Not Try This At Home, listed out a few of the more important things I was pretty certain this lawyer would miss in his contracts.

In response to that post, a reader emailed me to  ask what “really” goes into a Chinese employment contract. This post responds to that email and highlights what is “really” involved in drafting China employment contracts. The below is the email we send to clients that retain us to draft China employment contracts for their China WFOE, setting out the initial information we need to get started on drafting their employee contracts and Rules and Regulations.

I. Basic Information

Please provide the following information:

A.   Name and registered address of the WFOE, in English and Chinese.

B.   A one paragraph statement of: 1) the number of employees, 2) the duties and title of each employee, 3) the pay scale/rate for each employee, and 4) the nationality of each employee.

C.    The hours that you expect each employee to work. Standard working hours in China follow a 40-hour workweek: 8 hours a day and 5 days a week. If you anticipate any significant exceptions to that, please explain.

D.   The name and title of the person who will execute the employee agreements on behalf of the WFOE. Usually, the WFOE’s general manager will execute all employee agreements except for his or her own, which will be executed by the WFOE’s legal representative

II. Employee-Specific Information

A.   Required Information

For each employee, please provide the following information:

a.    The employee’s name and title, in English and Chinese.

b.    The employee’s registered permanent address, in English and Chinese.

c.    The employee’s contact address (if different from the above), in English and Chinese.

d.    The employee’s phone number and email address.

e.    The employee’s national ID number (身份证号码). I recommend getting a scan of the national ID card itself (身份证).

f.     The employee’s gender, citizenship, and date of birth.

g.    The employee’s place of work, if different from the WFOE address, in both English and Chinese.

h.    The term of the employment agreement, including the start date.

i.      The amount of wages during the standard employment term, converted into a monthly wage.

j.      The date that wages will be paid during the standard employment term.

k.     Whether the employee will be paid on a 12-month or 13-month schedule (more on this below).

l.      The term of the probation period.

m.   The wages during the probation period, converted into a monthly wage.

n.    Whether you would like to explore the possibility of an alternative working hours system (that is, an alternative to the standard of 5 days/week, 8 hours/day). The availability of this option will depend on the employee’s title and job duties.

o.    Whether you would like to explore the possibility of a non-compete agreement (more on this below).

p.    Whether you would like to have an education reimbursement agreement (more on this below).

q.    The employee’s relevant bank account information.

B.  Employment Term and Probation Period. The term of the probation period is roughly proportional to the term of the agreement. The maximum probation period is 6 months. To have a maximum-length probation period, an employment agreement must have a term of at least 3 years. At the end of the probation period, you can terminate the employee with no further issues. At the end of the initial employment term, you can terminate the employee and pay severance or you can sign the employee to another agreement.

We will need to confirm with the labor bureau in your specific city, but in most Chinese cities, once you have engaged the employee for two terms, once the third term starts, you are required to retain the employee up to mandatory retirement age. Termination during that period requires good cause.

The probation period should be treated seriously and no employee should be taken beyond the probation period unless you are certain that he or she will work out under the terms of this employee agreement. For new employees, we generally recommend a term of three years and a probation period of six months. Many of our foreign clients choose to do an initial term of only one year, and most end up regretting that decision.

C.    Monthly Salary. As noted above, you will need to convert each employee’s annual salary into a monthly wage. In many parts of China, it is customary to pay the salary on a 13-month basis, with the final month paid just prior to the Chinese New Year. Either approach is acceptable, but it is important to state clearly in the contract what you will be doing. Many employees expect a “New Year’s Bonus” and failure to pay it (if expected) can cause problems. This expectation varies by the industry (manufacturing vs. office work), the type of employees (blue collar vs. white collar), and the geographic location (north vs. south). Note that paying on a 13-month basis does not obligate you to pay more in salary; you would just divide the annual salary by 13 instead of 12.

III. Documents To Be Drafted

Our standard employment package includes the following documents:

– A.   Universal Documents

a.    Labor Contract. The employment agreement to be used with all employees, with different options selected with respect to the employee’s working location, the availability of alternative working hours systems, the length of the probation period, and the term of the agreement itself.

Because the employment rules vary from city to city in China. We will work with you and/or your HR department to go over the above issues and determine how to tailor the initial set of agreements.

b.    Trade Secrecy and Intellectual Property Protection Agreement. Self-explanatory, but tailored for use in China. We can further customize it if you have specific confidentiality policies or procedures.

c.    Rules and Regulations. This is a long and complex document that is basically a handbook on Chinese labor law. China is not an at-will employment jurisdiction. Employees are employed subject to contract and can be terminated only if they violate that contract. The rules and regulations set out the full set of terms that govern the employment relationship. Most of the content in this document is required by Chinese law and is therefore not optional. We can do some customization of this document, but not much.

d.    Confirmation of Receipt. A one-page document stating that the employee has received and understood the contents of the Rules and Regulations.

– B.  Optional Documents

a.    Non-competition Agreement. Chinese law allows for non-compete agreements, but the terms are restricted as follows:

  • As a general rule, only management staff may be covered.
  • The term is limited to two years.
  • Compensation must be paid to the employee during the entire term of restriction. The amount of compensation is not defined by law, but many cities have de facto rules.

Let us know if you are interested in non-competition agreements for any of your employees.

b.    Education Reimbursement Agreement. This agreement would be applicable in the following scenario: you pay major expenses for an employee’s employment-related education or training, but after the training is complete, the employee quits. In such a situation, you can require that the employee reimburse your company for the education expenses. To do this, however, you must first have in place a written education reimbursement agreement.

Let us know if you are interested in education reimbursement agreements for any of your employees.

Note that though our employment agreements contain basic anti-corruption language, they are not a substitute for full-fledged China  compliance program. If you do not already have such a program in place for China, we strongly advise that we also provide you with an anti-corruption manual to give to your employees, as well as anti-corruption training.

China’s Film Industry Online, Part I

Posted in China Film Industry

China’s theatrical box office market may be huge but the ancillary revenues (i.e. non-box office) are still relatively small in China. This is the first in a series of posts on developments in China’s digital ancillaries in a lead-up to the US-China Film Summit, which I will be attending along with a number of other lawyers from my firm and a talk I will be giving on China’s film industry before the Beverly Hills Bar Association on November 3. In this first post, I seek to provide a frame of reference for a discussion of ancillaries in China.

In recent years, a market-based Chinese film industry has started to emerge from the shadows of the older, centralized and state-funded model. As Professor Eric Priest pointed out recently in Copyright Extremophiles, this may even be contributing to an expansion of acceptable content for China’s censors. Censorship aside, we are seeing a growing foreign interest in developing Chinese programs intended predominantly or solely for the Chinese market. This desire to produce content for the Chinese market brings with it an appreciation of the need for intensive co-development of programs with Chinese creatives from the very outset; not, as is too often the case, using a script written in English and hastily translated into Chinese before a trip to Beijing. On the flip side, China is increasingly recognizing and coveting Hollywood’s expertise and finesse accumulated over more than 100 years. All of these things are driving co-development deals with a view to producing content with both Chinese domestic appeal and international flare.

Whether they are producing programs for the domestic market alone or Hollywood blockbusters to be imported under China’s 34-picture quota, copyright stakeholders, both foreign and Chinese, must keep an eye on all revenue streams available in China, not just the box office.

China’s ancillary revenues have been small by world standards. Just how small is hard to say. According to Liu Chi, in a recent and comprehensive paper entitled Challenges for the Chinese Film Industry after 2013, ancillaries made up only 10% of China’s total 2013 film business revenue, with 90% of revenue coming from box office. According to the MPAA, China’s 2013 box office was $3.6 billion. That would mean ancillaries were worth about 400 million out of a total Chinese market of about $4 billion.  Compare this to the US, where ancillaries account for most of a film’s revenue. Again, precise figures are hard to come by but ancillaries are sometimes taken as accounting for around 75% of revenue, with box office representing the remaining 25%. According to the MPAA, in 2013 the box office in the US and Canada was $10.9 billion. That would mean that ancillaries were worth $32.7 billion in a total North American market of around $43.6 billion. China’s 2013 box office grew 27% on the previous year while North America’s grew only 1%. There is vast scope for further growth in China’s box office and, with it, the ancillaries market.

Despite the dominance of China’s box office as a source of film revenue, some of the most interesting developments here in China are occurring in areas of ancillary exploitation, particularly digital home entertainment. These developments are even more striking given China’s woeful internet speeds — China’s average internet connection speed is ranked 79th globally and 10th in the Asia Pacific Region. See Make Way for the Mobile Shopper, by Devon LaBuik.

My next posts in this series will explore these developments.

China Employment Contracts: Do Not Try This At Home

Posted in Legal News

Had a conversation the other day with the in-house counsel for a relatively small American company. This lawyer thanked me for the China Law Blog and said that he had used it to write his company’s employee contracts. I was stunned by this statement and to avoid me saying something I might later regret, I immediately changed the subject.

I have by now calmed down just barely enough to write this post.

Here is a list of the crazy risks this lawyer took by writing his company’s own China employment contracts, even though he clearly is not himself a China lawyer, nor does he have any real experience with China law:

1. He speaks no Chinese so whatever he wrote would need to be translated into Chinese (I am going to assume that he at least did this). Unless he hired an experienced Chinese employment lawyer to do the translation, the odds that the translation will actually work are about 10,000 to 1.

2. I wish that I had asked him whether he also drafted the Rules and Regulations for his company’s China employees. A China employment contract without Rules and Regulations is of virtually no value for a company. I’m betting that he did not.

3. Did his employment contract and Rules and Regulations include provisions regarding the FCPA, China anti-corruption laws, expense reimbursements, education reimbursements, housing reimbursements, overtime, vacations, bonuses, trade secrets, non-competes, etc.? If they did, what in the world made this lawyer think that he knew how any of these are supposed to work in China?

4. Did he check with the local labor bureau to determine its position on various employment law matters? These labor bureaus are all over the map on countless employment issues and the positions of these labor bureaus truly matters. I am virtually certain he did not.

One of our China-based lawyers, Grace Yang, spends several hours each week keeping up to date with China’s employment laws and regulations and maintaining strong contacts with local labor bureaus throughout China. She has conveyed a small portion of that knowledge via the following China employment law posts:

Please understand that your reading all of the above posts will not give you the knowledge you need to draft a China employee contract, just as reading a medical book or two does not qualify you to perform surgery.

China Copyrights: China Piracy Means Whack A Mole

Posted in Legal News, Recommended Reading

Just read a really good, really comprehensive article on China copyright law with a focus on the music industry, entitled, Whack-A-Mole: A Brief History of Music Piracy in China.

Its conclusion says it all, but I certainly suggest you read the whole thing:

In short, piracy’s root causes evade simple explanations and solutions, and piracy remains a serious obstacle to the successful monetisation of creative works in China. For their part, copyright owners in China can do little more than focus on the pragmatics of how to subsist as “copyright extremophiles,” surviving in inhospitable conditions.

 If you are interested in China IP law, I recommend that you read it.

Teaching English In China: Be Careful

Posted in China Business, Legal News

Every few weeks one of our China lawyers gets a somewhat frantic email from an English teacher in China and we hate them. We hate them because the English teacher is invariably in some terrible situation and the only way we can help is to spend massive amounts of attorney time on their case, which makes no sense for anyone.

Our typical email comes from an English teacher who has not been paid for three months and then gets fired and whose school refuses to give them the papers necessary for the teacher to move on to another job, unless and until the teacher signs an agreement settling back wages for pennies (and that’s if the teacher is lucky) on the dollar.

The teacher is usually writing to see whether they have “a good case” and to see what they “should do.”

Our response is usually something like the following:

If what you say is true and you performed three months of work and you have not been paid for that, then yes you have a good case, at least legally. But for you to collect on your back wages you will need to hire and probably pay a local attorney to assist you. That attorney will likely write a demand letter to your former employer, demanding it pay your back wages and handle all necessary paperwork to allow you to get another job right away. But the problem with this is that your employer will probably ignore the demand letter and that then means that you will almost certainly need to sue to get any recourse and by the time you sue and get your case heard, you will be sitting in China with no job and no real ability to get a job and I am guessing that is not acceptable to you. So probably the best thing for you would be to do whatever you can to get your ex-employer to complete your paperwork as quickly as possible. I suggest you retain a Chinese lawyer for this as it does not make sense for you to pay American lawyer rates to have our China attorneys work this case for you.

The above situation is by far the most common. The second most common is something along the following lines (this is an amalgamation of various emails we have received):

I am seeking your advice regarding the following situation.

I teach after school English to elementary students in ______[Chinese city].

Yesterday, I was taken to the police station with two coworkers and we were questioned and told that we were working illegally. Though I have a Z visa, it turns out that it is not under the right company name and it says that I do one thing though I am doing another.

I clarified with the police officer that returning to work the next day would be illegal and they confirmed it.

That was followed by my company going and bearing gifts to the police and setting up a system whereby for future inspections the police will call ahead to give the company an opportunity to send its foreign staff away before the police come.

The fine was to be issued today and we were told that we did not have to go to the police, but a letter later in the day said we will go tomorrow. The company will cover the fine.

I had a long drawn out conversation with my bosses where they explained Chinese culture to me and in their words, “there is a legal written law and a social law and the legal law is antiquated and doesn’t work anymore so the social law functions to help people get what they need in society.”

I was assured by my company that it was safe to return to work and that no more trouble would come my way. I would not be surprised if this is true, but the ethics of it is driving me crazy.  Is this really how business is done in China or should I be seeking other employment?

Are there any legal companies in China or is this the norm? And when I look for another job how do I confirm whether my potential future employers are legit or not?  Is there a list of properly legal companies?

Our typical response to this sort of email is something like the following:

Your instincts are right. Your employer is violating Chinese law up and down and though it appears to have so far gotten away with it, that may not continue and if it does not, you might find yourself in a very unpleasant situation. It is almost always a really bad idea to be operating illegally in a foreign country and it seems that is what you are doing.

Bottom Line: Don’t take a job in China without first making sure that both your employer and your job will be on the up and up.

China’s Legal, Regulatory and Cultural Aspects: November 1 in Los Angeles

Posted in Events

On Saturday, November 1, University of Southern California’s Pharmacy School will be putting on a China event focused on medical related issues, entitled, “Exploring China: Legal, Regulatory and Cultural Aspects.” It will focus extensively on China medical issues and it will take place in PSC 108, at the School of Pharmacy, USC Health Sciences Campus, 1985 Zonal Avenue, in Los Angeles.

The following people will be speaking on the following topics:

  • Frances Richmond, PhD, Director of the Director, International Center for Regulatory Science, will give the welcome address.
  • Helen Niu, MD, PhD, from Allergan, will speak on China’s Role in the Biomedical Industry
  • Annie Yin, DBA, from Medtronic, will speak on Medical Device Regulation
  • Yang Cao, PhD, from China Pharmaceutical University, will speak on China’s Health System and Policy
  • Ni Yuan, MSC, from  China Pharmaceutical University, will speak on Medical Insurance System in China
  • Yingfeng Zhu, Evaluator, Shanghai FDA, will speak on Medical Device Registration
  • Gerald Loeb, MD, USC, will speak on Innovation and Start-Ups

And I will speak on The Practical Aspects of Chinese Law and also on Intellectual Property Considerations

There will then be a panel discussion at 4:00 p.m. and a networking dinner at 5:00 p.m., for which a separate registration is required. I spoke last year at USC and I am confident this is going to be a great event. Come one, come all. Click here.

Five Keys To Getting Good Quality Products From China

Posted in Basics of China Business Law, China Business
Our China lawyers have assisted hundreds of Western companies with the legal side of having product manufactured in China. That experience has enabled us to see what works and what doesn’t for China manufacturing. If you want to greatly increase your odds of getting good quality manufactured product from China, you should do the following seven things.1. Use a Good Company.  Sounds rather basic, but we constantly see this rule violated. If you do nothing else that we suggest in this post, do this one thing as it matters as much as all the other things put together. For how to learn more about “your” China company, check out Basic China Due Diligence. Is This Chinese Company Legitimate?2. Use a Good OEM AgreementGood contracts ensure that your Chinese company knows what is required of it and what will happen if it fails to provide it.

3. Use Detailed Documents. Chinese factories tend to do exactly what you tell them to do. This means that what you tell them to do needs to be clearly conveyed and that means your instructions and specifications should be detailed and in Chinese. Be specific.

4. Visit the Factory. Either your own people or a third party QC company should pay regular visits to your factory. Doing this allows you to make sure it understands what you wand and lets them know that you are serious about making sure you get it.

5. Inspect. Perform regular product inspections appropriate to the product you are having made.

Do the above and your odds of getting good product go way up. Don’t do the above and they go way down.

Your China Distributor. Because What Happens In China Doesn’t Stay in China.

Posted in China Business

Forming a company in China is almost always difficult and expensive. Operating a company in China is also almost always difficult and expensive.

Operating a company in your home country of England, the United States, Canada, Australia or wherever is itself plenty difficult, would you not agree? Now take what you have to do in your home country and add in the inherent complexity of having to do essentially the same things in a foreign country with a foreign language with a different culture and under different laws.

That’s China.

China company formations are more difficult and expensive today than they were five years ago, and the same holds true for operating a company in China. Add to this that China’s consumers are getting wealthier and savvier and you can see why there has been a rapid increase in companies seeking to sell their products in China without establishing a company in China to do so.

One of the more common ways companies seek to sell their products in China without forming a company is by having a Chinese company act as their distributor. For more on this, check out Selling Your Product To China Through A Distributor. Just The Basics.

A few months ago, I was contacted by an American company that had been approached by a Chinese company wanting to be “the China distributor” for the American company’s fairly well known consumer product. At one point during our conversation, I talked about some of the issues we address in our China distribution contracts. I talked about how we put in provisions dealing with the intellectual property. I talked about how we like to see provisions that set out the Chinese distributer’s sales requirements.

I then talked about how critical it was that we conduct due diligence on the Chinese company. The client responded by pointing out that the distribution agreement would allow it to quickly replace its Chinese distributor if it turned out not to be a good fit, and so it did not seem like any real due diligence should be necessary. I then quickly reeled off a number of things the Chinese distributor might do in the first few weeks of the arrangement that could jeopardize the U.S. company’s reputation worldwide. The U.S. company instantly understood.

Bottom Line: What happens in China does not stay in China. If your Chinese counter-party does something disreputable in China that some people would link to your company, your company’s reputation likely will suffer. This “something disreputable” could be anything from a product defect to paying a bribe. Even if your company’s connection to the “disreputable something” is extremely tenuous, if your company name is in any way attached to it, your company will likely suffer. The best way to prevent that sort of problem is to choose your partner wisely and the best way to choose your partner wisely is to know as much as you can about it by engaging in appropriate due diligence.