China Cybersecurity law

China’s Cybersecurity Law (CSL) became effective on June 1, 2017 and it regulates the construction, operation, maintenance and use of networks, as well as network security supervision and management within mainland China. The Cyberspace Administration of China (CAC) is the primary governmental authority supervising and enforcing the CSL.

The CSL regulates cybersecurity from different aspects, including network operation security, network information security, as well as monitoring, early warning, and emergency responses.

  1. Network Operations Security

Under the CSL, all network operators are required to perform the following duties to protect their networks from interference, damage, or unauthorized visits, as well as to prevent data leaks, thefts or falsification:

  • Create internal security management systems and operating policies, appointing dedicated network security persons;
  • Adopt technological measures to prevent computer viruses, cyber-attacks, network intrusions and other harmful activities;
  • Monitor and record network operational status and network security incidents, and retain relevant network logs for at least six months;
  • Take measures to classify data, back up and encrypt important data.

The CSL states that China has (or will have) a tiered network security protection system and network operators must perform the above duties to ensure network security and to meet the requirements of such a system. This indicates network operator obligations vary depending on their tier.

China currently has two existing network security related tiered protection systems. One is the Computer Information Systems Security Tiered Protection (计算机信息系统安全等级保护制度), the other is Telecommunication Networks Security Tiered Protection (通信网络安全分级保护制度), though the contents of these two overlap regarding network security. Both of these protection systems put computer information systems or telecom networks into five levels of protection, depending on a system’s importance in national security, economic development, and social life, and potential damages to these aspects in the event of network interference. Whether the tiered system mentioned in the CSL will be similar to these two existing systems or a completely new one is not yet clear. But these systems and related national standards likely will be helpful guides to understanding the concept of China’s tiered protection system.

Critical Information Infrastructure Operators

Critical information Infrastructure (CII) and CII operators must comply with more stringent requirements on top of those applicable to all network operators. The CSL provides for the State to implement key protections for CII in public communication and information services, power, traffic, water, finance, public service, electronic government affairs, and other CII that may endanger national security, national welfare and the people’s livelihood, or the public interest in the event of destruction, malfunction or data leakage. No clear definition of CII is found in the CSL and the catchall language leaves plenty of room for interpretation.

However, there is a Network Security Check Practice Guide (网络安全检查操作指南, the “Guide”) created by the CAC[1] before the CSL became effective that may give some guidance in determining CIIs. The Guide lists out fourteen industries[2] and a few key businesses in each industry. If a network or information system is mainly used to support any of these key businesses in  corresponding industry and meets other specific conditions, such a network or system will likely be deemed to be a critical information infrastructure.  For example, online shopping is a key business in the telecommunication and the Internet industry, according to this Guide. One of the conditions for a platform to be determined as a CII is that the platform has more than 10 million registered users or more than 1 million active users.

Though a clear definition and scope of CII have not yet been clarified, the CSL does require CII operators comply with the following, in addition to the requirements for all network operators:\

— Annual security assessment

CII operators shall review their networks’ security and assess potential risk at least once a year, either by themselves or through a third-party service provider.

— Procurement Security Review

When purchasing network products and services, CII operators must sign a security and confidentiality agreement with their vendor, clearly setting out the duties and responsibilities for security and confidentiality. If a vendor procurement may impact national security, CII operators must also go through a national security review by the State network administration (CAC) and other relevant departments of the State Council. The Security Assessment Measures for Network Products and Services provides further details in this regard, which became effective on the same day as the CSL.

— Data localization

CII Operators are required to keep within mainland China all personal information and important data collected and generated within mainland China. They are not allowed to transmit such data overseas without firs passing a security review.

The Draft Data Transfer Measures released in April 2017 (“First Draft”) appear to expand the scope of undertakings for such data localization and security review requirements to non-CII operators, which raised concerns for many foreign companies doing business in China. In a revised draft of the First Draft in May (“Second Draft”), this localization requirement was removed. The Second Draft focuses only on security assessment of cross border data transfer.

— Other requirements

Other requirements for CII operators include the following:

  • Set up dedicated security management and persons responsible for security management, and conduct security background checks on those responsible persons and of personnel in critical positions.
  • Regularly educate, train, and evaluate employees on cybersecurity;
  • Back up important systems and databases in preparation for disasters;
  • Establish emergency response plans for network security incidents and perform drills periodically; and other obligations by law or administrative regulations.

Network Information Security

“Network Information Security” essentially refers to the protection of personal information collected and stored by network operators. All network operators are subject to the following requirements when collecting and using personal information:

  • Maintain strict confidentiality of collected user information.
  • Collect and use personal information legally, properly, and only to the extent the collection is necessary.
  • Disclose the purpose, method, and scope of collection and use, and obtain consent from the person whose personal information is to be collected; personal information irrelevant to the service provided shall not be collected.
  • Networker operators shall not disclose, alter, or destroy collected personal information.
  • In the event of data breach or a likely data breach, network operators must take remedial actions, promptly inform users, and report to the competent government agencies according to relevant regulations.
  • In case of illegal or unauthorized collection and use of personal information, a person is entitled to ask a network operator to delete such personal information; when information collected is wrong, an individual can request correction.

— Monitor, early warnings and Emergency Response.

 In terms of establishing cybersecurity monitoring, early warnings of potential risk and emergency response plans, the CSL also sets out the responsibilities of the CAC, network operators, local government, and industry specific departments.

[1] We found different versions of this Guidance on the Internet (websites of universities, local governments, etc.), each of which claims to have been released by the CAC. However, the CAC website did not itself have its own guidance on its website when we looked for it.

[2] The different versions of the Guidance we saw are substantially similar. As for the industries listed, one version includes education, news websites, and commercial platforms as key businesses industries, while another does not have these three lists 11 industries. We refer to the former version only for the purpose of this blog post.

Shanghai employment law
Life is RELATIVELY good for Shanghai employers

As I have previously written, one of the best grounds for terminating a China-based employee without having to pay severance is serious breach of employer rules and regulations. I have also written how employers may have no remedy against an employee if they have no specific provisions in their rules and regulations justifying the termination of an employee for serious wrongdoing. But in Shanghai, employers may be able to terminate an employee who has acted in bad faith so long as they have reasonable grounds for doing so pursuant to their rules and regulations.

Let’s look at a recent Shanghai case whose facts I have simplified a bit for this post. The employee was hired to work as a sales assistant. The employee submitted a request to the employer to take 15 personal days because her mother-in-law was sick and she needed to attend to her. The employer approved this request but then learned that the employee went on vacation abroad for about 5 days during the 15-day period. The employer then issued a termination notice, citing a serious breach of labor disciplines based on the employee having deceived her employer to secure her personal days. The employer’s rules and regulations stated that employees could be terminated for dishonest behavior. The employee brought a claim against the employer for unlawful termination and won, but the arbitrators did not award the amount of damages the employee was hoping to get. So both parties were dissatisfied with the arbitral award and sued each other. The employee lost at trial and then lost again on appeal. The employee argued that she had planned to do some international traveling before she asked for the personal days but because her mother-in-law fell ill, she decided to postpone her trip. But when her mother-in-law got well about 5-6 days into her personal leave, she then decided to go on her trip as originally planned. She argued that because she was not getting paid during her personal days and because her employer had already approved her request to take those days off, she should have had the freedom to arrange her own time and basically do whatever she wanted during her personal days.

The court held that even though the employee rightfully went on personal days to take care of her sick mother-in-law, when that basis for her leave ceased to exist, the employee should have performed her duty of good faith and complied with basic professional ethics as an employee and reported her new situation to her employer. Her failure to inform her employer about her planned trip and her using her personal days to go on vacation violated the duty of good faith she owed to her employer. The employer terminated her according to its rules and regulations and there was nothing unlawful about such a termination. The court did not talk about how seemingly harsh the employer’s termination decision was.

Don’t read this case to mean that your rules and regulations do not need to be reasonably specific for it to be held enforceable. Shanghai courts — more so than probably anywhere else in China — dislike employees who act in bad faith. Nonetheless, if you don’t have a set of enforceable rules and regulations, you will still find it virtually impossible to terminate a problem employee.

China bribery. Don't. Just Don't.
China bribery. Don’t. Just Don’t.

Earlier this week I gave a talk before the Chinese Chamber of Commerce in Cleveland. One of the things I talked about was how it is wrong to contend that contracts are not needed in China because of court corruption.

I talked of how most Americans don’t understand court corruption. Otherwise they would not so frequently say that there is no point in bringing a lawsuit in such and such a court because it’s corrupt. Corruption influences (sometimes greatly) court cases, but neither as often nor as much as so widely believed. When dealing with court corruption, one has to be sensitive to location, type of case, and relative influence of the parties. In other words, a $300,000 breach of contract case between a foreign company and a Chinese private company is much more likely to get a “fair trial” in a Chinese court in Shanghai than a case against a massive China State Owned Entity involving stolen trade secrets that might have military applications in the small Chinese city in which that SOE is based and employs a large percentage of the town Sometimes this is due to corruption and sometimes this is due to what lawyers commonly call getting “home-towned.” There are Wall Street lawyers who are as afraid of going to trial in a rural Alabama court as US companies are of going to trial in China.

But when Americans think of a corrupt court they usually think of the opposing party paying a judge in cash for the ruling of their dreams. But it is rarely that simple. I was taught the “finer points” of court corruption by a very smart, very honest Russian lawyer friend of mine who practiced law in the Russian Far East. What he explained to me works pretty much the same way in most of the other emerging market countries of which I am aware with a less than pristine court system — or at least that is what lawyers in some of these countries have told me.

My schooling on Russian court corruption was in “real time” as it involved a real case and a real client. It has been many years so I may be a bit off on the numbers and it is possible things have changed in Russia since then and it is also possible this information held true only for this one region in Russia. It is also possible the Cleveland Cavaliers will sign me to a multi-million dollar contract within the next few months.

My client had a contract with a Russian company under which the Russian company clearly owed my client $2 million, but the Russian company was refusing to pay and all but challenging my client to sue it in a Vladivostok court, the only place my client could pursue its claims. Legally, my client’s case was about as close to a slam-dunk winner as you are likely to see in a business dispute. But my client was rightfully concerned how corruption would influence its case.

Our Russian local counsel explained how we should view the case, corruption warts and all, and he did so by explaining the following:

Nine of the fifteen judges are corrupt. The other six are not. But I still like our case even before one of the corrupt ones. First off, there is a very good chance the opposing side will not offer any bribe at all. Second, our case is so strong it is possible that even if offered, none of the corrupt judges will take it. Third, if any do take the bribe, it will be really high because no judge wants to be thought of as corrupt and ruling against our client in this case will definitely raise eyebrows.

The Russian company will probably need to pay the lower court judge approximately $300,000 for the ruling it wants. And then we can appeal to a three judge appellate panel, made up of judges from throughout the province. A lower percentage of the appellate judges are corrupt and those that are require large payments, especially on a case like this. The odds of all three of our appellate judges being corrupt are quite low. The odds of the Russian company having close connections with any of the appellate judges are lower than when all of the judges are based in its home city. This means that to try to bribe two of the three judges will be very risky and very expensive. Risky because people sometimes do go to jail on bribery charges. Expensive because we are talking about 3 appellate judges. So in the end, I estimate that for the Russian company to be assured of winning through the appellate level, it will need to pay maybe a million dollars. And that ignores our ability to at least try to appeal to the Supreme Court in Moscow.

These numbers are just estimates but this means that even though corruption is a factor, we cannot allow our client to panic in the face of it. We can settle this case on good terms and that is what we should be trying to do. The Russian company would rather pay us to eliminate risk than pay a bunch of judges and take on new risks.

We ended up settling the case and at a figure not all that much lower than what it would have been in the United States.

I am not by any means trying to minimize the impact of corruption; I am merely trying to show that it oftentimes is not as overwhelming as it may initially appear.

Note also that we never discussed our client paying a bribe to anyone. That is always the worst alternative because it puts people at real risk of going to jail without anything close to a guarantee it will even work. When our Russian lawyer said that people in Russia rarely get arrested for bribery, he was talking about Russians, not foreigners. Do you really think you have the savvy to engage in risk-free bribery in a foreign country? I can tell you that none of our firm’s China lawyers would ever make that claim.

When I talked about the above at my Cleveland talk, an audience member, Kimberly Kirkendall, commented that in her experience many of the times where she was aware of someone having paid a bribe in China they had done so essentially because they wanted to, not because it was necessary they do so. We then talked of how some companies seem almost to delight in paying bribes but that our China lawyers — believe it or not — had never once been asked to pay a single bribe in China, even though we are constantly dealing with the Chinese government to register trademarks and copyrights and WFOEs and Joint Ventures. Kimberly commented on how foreigners sometimes brag about paying bribes and how troubled she was by that. I then mentioned how stupid and risky it is to pay bribes in China.

I spoke with Kimberly after the event and learned of her extensive experience and of how she had recently written on China bribery. When I got back to my computer I read what Kimberly had written and I loved it, and with her permission, I am running an excerpt from it below.

 

In China 30 years ago it was very common to incentivize someone to do their job by giving them a gift. Why? The China of the late 1980’s and into the 90’s was a communist economy that relied on 95% government controlled business. And in that communist economy there was very little difference between the salary for the GM of a factory and the guy who mopped the floor. So how were they compensated for their relative value to the organization? The GM could “gift” some of the company’s products to someone else, who often then re-gifted that to someone they wanted to influence and so on and so forth. By gifting them, the GM was able to get a slightly larger apartment, or their child in a better school, or some other economic benefit. People recognized their relative power in the economy by giving and/or accepting gifts. Sometimes cash, but frankly there wasn’t a lot of cash to go around. Much of this was actually bartering, trading your goods/access/influence for someone else’s.

In the booming late 1990’s and into the early 2000’s, as people were allowed to own a business in China, things changed a bit. How do you move a government owned or controlled economy to a privately held one? Where do individuals get the money to buy apartments or companies if they weren’t making much cash beforehand? In this period of transition there were many instances of people using their power and influence for economic gain. From how these government companies were taken private (and ownership and shares divided up) to how people came up with the money to buy apartments or build new ones. In this environment people in high positions saw the money being made and they wanted their share – and now there was the cash to pay them.

Towards the late 2000’s and into today, we are looking at a China where many people (but not all) are in a position to make money in direct ways. Through entrepreneurship, increased education and wages, investment, taking risks on new ventures, or changing jobs to accelerate their careers. Much of the population are no longer stuck in a powerless place where bribes are their only way to obtain value from their position of authority. Certainly it still exists, and there are still people who feel that they can’t get ahead so they exact a little extra money on the side.

When I hear that a US company has used bribes I start wondering about the reason for the bribe. Was it a payment to someone to do his or her job or a payment for them not to do their job? In almost every instance these days, it seems it is the foreigner who initiates the bribe. The below examples of matters on which I personally worked highlight the important difference between these two reasons.

Example: A U.S. company was importing components from China, using both its own team in China to find suppliers and control the orders and a trading company. The US management came to be for help in figuring out why some in their company were claiming that they needed to use a trading company for some of their China business, even though the trading companies were increasing costs by taking their own payments from the transactions. They wanted to know why they were paying a trading company to buy and export goods when they could do all of that themselves. It turned out that a group within the company wanted to utilize lower HTS custom codes for export to save money and Chinese Customs didn’t agree with that custom code classification. The US company was using the trading company to pay China customs a bribe so they could export their products under the “wrong” code and save money. In other words, there was no need to pay bribes, just a desire.

Example: A company was setting up a factory in China and the local government was concerned about air emissions from its manufacturing process. In the U.S. the company had shown that emissions were well within range of EPA guidelines. The local Chinese agency was not convinced and asked for more tests and documentation. The company was left with options – see if there was an “economic incentive” that would encourage the regulatory official to approve the paperwork, or spend a few months and thousands of dollars doing the research to prove their manufacturing met the guidelines. They chose the “economic incentive” route. Again though, an example of a company choosing to pay a bribe out of a desire to get a government official not to do his or her job, not a bribe necessary to get that official to actually do his or her job.

The point I am trying to make here is that the excuse foreigners make about having no choice but to pay a bribe rarely if ever holds true. The foreign companies I hear about paying bribes had plenty of choice; they simply chose wrong. They were not responding to a request for money but offering money as an incentive for a Chinese worker to deviate from his or her professional responsibility.

Getting paid from China: Takes more than just pressing a key
Getting paid from China: more than just pressing a key

We are frequently contacted by foreigners who want advice on “how to get money out of China”. Usually the questions concern the purchase of assets like real estate or stock and other securities by a Chinese entity. The standard situation is that the deal is closed, the closing date has arrived, but the Chinese side fails to perform, claiming the Chinese authorities will not allow it to remit the funds. Simply stated, the Chinese side wants to make the payment, but the government will not let them.

This problem is not limited to high value asset transactions. This common situation is, however, a result of a more general issue that arises with doing business in China. The fact is that every payment made from China must be approved. That is, it is not just large sum foreign investments that must be approved. Every remittance, no matter how small and no matter how routine, must be approved prior to remittance from China.

Approval is not automatic. Every remittance from China requires conversion from RMB to dollars or to some other foreign currency. The Chinese foreign exchange bank works with the local tax and other authorities to review every conversion and remittance.

When the Chinese government decides to limit outflows of currency, transactions that have been routinely approved in the past can suddenly become problematic. Delays occur, new taxes and fees are imposed and in some cases the payment is denied. This then means that there is real payment risk for every payment made from China. This is not limited to big investment transactions. All payments from China are reviewed by the foreign exchange bank. It is never certain what the bank will decide. For this reason, all payments from China are subject to payment risk due to government restrictions.

This issue arises in a number of business sectors:

— In the sale of high value equipment, it is common to accept payments in installments. Many problems can occur. In some cases, the Chinese buyer will make and order but then fail to pay the down payment, claiming that the Chinese authorities will not approve the payment. The Chinese side then asks for “cooperation” in providing additional documentation demanded by the foreign exchange bank or local tax office. Eventually, the Chinese side pressures the U.S. seller to start work or to ship prior to payment, blaming the delay in payment on the Chinese authorities. In a similar situation, where several installments are involved, the buyer will succeed in making the first several installments, but then will delay in making later payments, blaming the delay or failure to pay on the Chinese regulatory authorities. In these cases, the foreign seller is now trapped: the product is shipped and it is not clear whether full payment will ever be made.

— In licensing of technology or the licensing of media, there are often annual royalty payments that must be made. The Chinese side will normally negotiate a system that provides for payment of the royalty at the end of the royalty period. The payment day arrives and no payment is made because the foreign exchange bank refuses to process the payment. There are many reasons the bank may refuse to remit. One common reason is that the license has not been properly registered. Some banks will insist on a particular form of invoice. Other banks will require proof of the existence of the licensor and the validity of the license. In other cases the local tax authorities will impose withholding taxes of a type or in an amount that was not anticipated by the parties. The problem in all of these cases is that the Chinese side has obtained the benefit of the license for a full year before the issue of payment is raised. The foreign party is now assuming all of the burden for non-payment with no corresponding cost imposed on the Chinese side.

— Service contracts of all kinds are particularly risky. The reason is that a primary way Chinese entities illegally transfer funds out of China is via false service contracts. Since the risk of fraudulent transfer is quite real, Chinese banks are particularly careful in reviewing service contracts. This means legitimate service agreements are subjected to the same careful scrutiny. Since service agreement are typically quite informal and poorly drafted, the agreements often fail when examined by the banks and tax authorities. When this occurs, the Chinese entity reports that their attempted remittance has been denied or a large tax no one anticipated has been imposed. This can be a major disaster for service providers when the service has already be provided. Since the service is intangible, there is no way to repossess in the way that could be done for piece of equipment or a parcel of property.

What all this means is that every foreign business expecting payments from a Chinese entity must understand that payment risk is significant. Since the risk is real, mitigation measures are essential in order to avoid disaster. In my next post I will discuss the various ways to deal with this China payment risk issue.

Grey Market GoodsIn this projected 4-part series we’ll take a closer look at grey market goods and China. In part 1, we’ll consider what grey market goods are and why manufacturers get so worked up about them. In part 2, we’ll look at how grey market goods are regulated in China. In part 3 we’ll look at how grey market goods are regulated in the United States. And in part 4, we’ll look at grey market goods and Chinese factories, and what foreign companies can do to protect themselves.

Part 1: What are grey market goods, and why do they matter?

Grey market goods are authentic goods sold by unauthorized means. Unauthorized does not necessarily mean illegal; it simply means the goods are coming from someone other than (1) the original manufacturer or (2) a third party to whom the manufacturer has granted permission to resell the goods.

E-commerce has made all manner of grey market goods readily available. When I purchase Gillette razor blades on Amazon for delivery in the United States, the cheapest sellers are all offering grey market blades packaged for sale overseas (typically, Asia, Eastern Europe or South America). Although it’s unclear if these blades are exactly the same as what I would buy at a drugstore in the U.S., the price difference is significant enough that I’m willing to take the chance. And that’s just one example. Any product that has a significant difference in price or availability across different countries is likely to be sold on the grey market. And the flow of goods could go in any direction; it just depends on price and the demand. As China’s consumer class has grown in strength, so has the market for grey market goods. Products as disparate as Apple’s iPhone and Pfizer’s Viagra did significant business in China as grey market goods before they were officially available there.

Grey market goods are hardly a creation of the Internet, though.

A Vancouver, BC man named Michael Hallatt grew tired of waiting for Trader Joe’s to come to Canada, and since 2012 he has operated a store in Vancouver called Pirate Joe’s that stocks nothing but goods bought at Trader Joe’s stores in Washington State. All of the goods are purchased at retail prices in Washington and then marked up for sale in Canada. Trader Joe’s has been trying to shut Hallatt down for years, and has sued him for trademark infringement, unfair competition, false designation of origin, and false advertising.

Two weeks ago Pirate Joe’s announced it was closing its doors, which would have made the lawsuit moot, but at the end of last week Hallatt reversed course and announced on the PJ’s website that he was back in business. What makes Pirate Joe’s story interesting for IP attorneys is how it calls into question the limits of grey market sales. Hallatt certainly seems to enjoy tweaking Trader Joe’s and skirting the edge of the doctrine, but as the Freakonomics blog pointed out in 2013, reselling Trader Joe’s goods is no different than reselling goods on eBay or at a yard sale. The case is still pending.

In another well-known story, Costco purchased large quantities of Omega Seamaster watches from an authorized reseller in Europe, then resold them in the U.S. as grey market goods. Because the prices in Europe were so much cheaper than the retail prices in the U.S., Costco was able to add its usual markup and still price the watches at a substantial discount. Omega sued, but after a protracted battle, Costco prevailed in 2015.

It may be self-evident that the reason grey market goods exist is because there’s a market for them: grey market goods are either cheaper than the goods available through standard channels (e.g., the Omega watches at Costco and the Gillette razor blades on Amazon) or they are simply unavailable through standard channels (e.g., the goods at Pirate Joe’s). A reasonable argument can be made that grey market goods are in fact good for many manufacturers, because they increase brand recognition and product loyalty. And profits! All of these products have been sold by the manufacturer at a price (if not a use) they deemed acceptable.

Nonetheless, grey market goods are often decried by original manufacturers for reasons including the following:

  1. Grey market goods are often difficult to distinguish from counterfeit goods, which harms the reputation of the brand and the manufacturer.
  2. Grey market goods are often customized for the particular market for which they are made, and are unsuitable for use in other markets. This too harms the reputation of the brand and the manufacturer.
  3. Grey market goods often have different warranty protection — or none at all — when sold or used outside the market for which they were made. This causes customer frustration and dissatisfaction.
  4. Grey market goods sometimes are of lower quality (hence the lower price), which harms the reputation of the brand and the manufacturer.
  5. Grey market goods often interfere with the business expectations of the original manufacturer and its licensees.

In Part 2 of this series, we’ll examine how China regulates grey market goods.

China employment laws and foreign companies. One tough mudder.
China employment laws and foreign companies. One tough mudder.

The China Labor Bulletin just did a post revealing something my law firm’s China lawyers (especially our China employment lawyers) have sensed/felt for quite a while: China employees increasingly know their rights and have no compunction about doing what they can to enforce them:

While latest national LDAC case data compiles data only up to 2015, local government reports reveal more recent statistics, and tell stories of the rising rights awareness of workers.

A whitepaper on labour disputes from Guangzhou noted the increasing diversity of grievances raised by workers in recent years. Unpaid social insurance, for example, account for over 40% of all arbitration cases over the past three years. Women workers are an increasing portion of all cases, and are taking action against unequal treatment, illegal firings or wage cuts during pregnancy or maternity leave, and discriminatory hiring practices.

Though this article does not specifically address employment cases against foreign companies doing business in China, I would venture to bet that employment disputes between Chinese employees (and expat employees as well) and foreign companies have increased at an even faster pace. We see this in the number of emails we get from both employees (expats mostly) seeking to sue and from employers threatened with lawsuits. In virtually every employment dispute we take on as counsel, however, the parties eventually settle, meaning they never become a part of any Chinese government statistic.

I wrote on this last year for Above The Law, in an article entitled, China Employment Disputes: Settle, Settle, Settle: Attorney Dan Harris says there’s only one way to deal with labor disputes in China. That article started out with the following:

Every few weeks, one of our China lawyers gets an email from a foreign company (virtually always a WFOE) that is in a dispute with one or more of its China-based employees. These foreign companies are usually surprised to find themselves in such a dispute because they are of the view that they did nothing wrong. They too often believe that hiring my law firm will consist of us spending an hour or two reviewing the facts and the law and then telling them that they did nothing wrong and then making the case go away.

The only difference today is that we are getting those emails every single week, and usually more than one. But what hasn’t changed is what causes foreign companies to get themselves in this situation, nor what they need to do to get out of them. The two leading causes for the employment disputes we see are a failure to have a well-crafted set of Rules and Regulations combined with maladroitly handled employee terminations. See China Employee Termination: Avoid These Mistakes. We also have seen no slow down in foreign companies getting into big trouble for having “employees” in China without their actually having a China WFOE to serve as the employer. See Doing Business in China with Deportation or Worse Hanging Over Your Head.

Bottom Line: China wants foreign companies doing business in China for financial reasons and those companies that are not fulfilling their China financial duties, be it via taxes or employee payments are at risk.

China CopyrightsOn Friday June 23, in collaboration with the National Copyright Administration of China, the United States Patent and Trademark Office will be putting on a one-day conference on legal protections for sports broadcasts. This event will take place at the Novotel Beijing Peace Hotel and run from 9:00 a.m. until 5:00 p.m. that day.

There is no charge to attend.

The leader of our China entertainment group, Mathew Alderson, will be speaking at this event. This event will explore the different ways countries protect the creative content of live events, with a particular focus on broadcasts of sporting events. As China continues to develop amendments to its Copyright Law, now is an opportune time for an in-depth discussion in this area.

The program will bring together US, Chinese, and European government officials, academic leaders, and industry representatives to discuss the importance of providing legal protection for sports broadcast programs, including the role of copyright protection, how sports broadcasts are currently protected in China, the United States, and the European Union, and international perspectives on the subject. Go here for more information on the event and here for more information on how to register or can just contact Ms. LIU Jia and provide her with the following registration information:

1. Your full name
2. Your organization
3. Your full position / title
4. Your email address

Hope to see you there.

China litigation
Owed money by a Chinese company? Sometimes you just have to sue.

Nearly every week, an American or a European company (or sometimes an Australian company) will write to one of our China lawyers asking what it can do to get paid on its contract. The amounts typically owed are between $50,000 and $250,000, but sometimes they run deep into the millions.

These companies writing us are not our law firm’s existing clients because we so strongly advocate not doing deals with Chinese companies without getting a substantial payment upfront. See Want to Get Paid by a Chinese Company? Do These Three Things:

Demand a large amount upfront and make clear both orally and in your contract that you will not begin work or ship your product until you receive the full amount of this initial upfront payment. Having a large upfront payment works both to prove good faith by the Chinese side and to prove that the Chinese side is able to make large payments outside of China. China’s currency, the renminbi, is still a nonconvertible currency and any time a Chinese entity wants to send US currency to a foreign entity (greater than $50,000 a year), it needs approval from the transmitting Chinese bank. This generally requires the parties to have executed a contract (in Chinese) for goods or services that are acceptable for foreign entities to provide, and that the foreign company has submitted a formal invoice in a form acceptable to the bank — because the bank in turn usually needs to get approval from government authorities. For the specifics on what is required to get paid by a China company, check out Service Companies In China. How To Get Paid.

These companies writing us for help in getting paid are obviously past the point where a well-crafted contract can help them and they want to know exactly what they should do to get paid. One of our China attorneys recently responded as follows to such a company with very large amounts owed to it by two Chinese companies, one a State Owned Entity (SOE) and the other a privately-held Chinese entity (I have modified the email a bit to hide any possible identifiers):

Usually the best way to collect money owed to you by a Chinese company is to file a lawsuit. Otherwise, the Chinese company will probably just ignore you. The problem, of course, is that lawsuits by WFOEs against SOEs are not favored in China. If your claim has any defect, that defect will normally defeat the claim. However, filing a suit can provide you with leverage in any settlement negotiation. Your case against the privately-held company will probably be easier. But for both cases, much will depend on the quality of your contract and until we review those contracts we would only be guessing at your chances.

Sending demand letters to Chinese companies tends to be a waste of time, though they often make sense to confirm the default, if such confirmation is required under the relevant contract. Most Chinese companies ignore demand letters and this is especially true of SOEs. These two companies have been the clear decision not to pay you and unless and until you sue them, they probably will stick by that decision. In fact, sending a demand letter from your lawyer is seen by many Chinese companies as a sign of weakness. They are of the view that if you are really going to sue them, you would do so and not just send out letters. Those who send demand letters are too cheap to hire a lawyer to do anything more.

So that leaves filing a lawsuit against these two Chinese companies. But lawsuits are rarely inexpensive and filing one will permanently affect your relationship with these buyer and it could hurt your standing in the _______ industry in general. Litigation should therefore be initiated only after careful consideration. I cannot assess your chances of prevailing in litigation until after a review your contracts and other documents and get a much better sense of the entire factual situation. But I can tell you that just like in the United States, litigation in China is expensive (though usually considerably less expensive than in the United States, slow (though usually considerably faster than in the United States) and uncertain. So pursuing litigation is not a course to be taken lightly. However, when you are being ignored, it is the only affirmative action you can take.For what it is worth though, the World Bank recently ranked China as the fifth (5th) best country in the world in terms of contract enforcement!

Using an “intermediary” is a standard “old school” Chinese practice. Provided no bribe is given to this intermediary and provided this intermediary acts pursuant to China law, using such an intermediary is not illegal. [This was mentioned because the company owed the money said that someone had told it to collect the debt in this way]. These intermediaries typically charge a percentage of what they collect and you should measure that percentage against the cost of litigation. The problem with using an intermediary though is that you become dependent on the intermediary and your contract with that intermediary may make it difficult or impossible for you to sue your creditor if and when you wish to do so  and you become liable if your intermediary for whatever it does that is irregular or illegal. Most importantly, its chances of success are uncertain and we have seen instances where intermediaries have not only failed to collect, but the things they have said and done have essentially ruined the chances of succeeding in any lawsuit.

Using an intermediary in your case seems particularly problematic for two reasons. How is an “intermediary” going to convince an abusive SOE to pay its bill to you a WFOE? It sounds far fetched to me, but I don’t have all of the facts. Two, you are coming up against a statutes of limitations that may prevent you from ever being able to sue these two companies. The last thing you want to do is miss out on your opportunity to sue because you are bogged down using an intermediary. I do not know enough about your case to tell you how to proceed, but I can tell you that we generally advice against companies using intermediaries to collect on their China debts.

If want me to review the contracts and other documents that would support your claims, I am available to do that.

China licensing agreements
China Licensing Agreements: The 101

As IP protection in China continues to grow stronger, foreign companies are seeking to access the Chinese market in increasingly sophisticated ways. For many such companies, a license agreement makes the most sense, and to no one’s surprise at our firm, we have been drafting more than ever before. But just because a license agreement makes sense doesn’t mean ANY license agreement will work. You need an agreement specifically drafted for use in China.

1. Require an upfront payment. It makes sense to require Chinese licensees to make an upfront payment. An upfront payment shows good faith on the part of the licensee, and also motivates the licensee to monetize the licensor’s IP. Even more important, an upfront payment establishes that the Chinese side is actually able to make payments. This sounds trivial, but we have stopped counting the number of deals that fell apart because the Chinese side’s bank refused to make payment because of a license agreement’s content. (Deals involving Chinese educational institutions are particularly tricky.) Even a payment as small as a few thousand dollars can be sufficient to provide an adequate test, but ideally it would be more than $50,000 so you can be sure the payment was not made under the annual $50,000 exemption. And the payment should be from the company that executed the agreement. If you get a payment from an individual (like the licensee’s CEO) or a related company, chances are that the company is just playing games.

2. Register the agreement with the relevant Chinese authorities. Every license agreements in China should be registered, and in many cases registration is mandatory. For instance, any technology transfer agreement for technology on MOFCOM’s “restricted” list must be approved by MOFCOM before the agreement can become effective and the technology can be imported legally. Almost every bank in China requires license agreements to be registered with the relevant IP authority before approving payments: trademark license agreements must be registered with the Chinese Trademark Office (CTMO); patent license agreements must be registered with the State Intellectual Property Office (SIPO); and copyright license agreements must be registered with the Copyright Protection Centre of China (CPCC). And any patent, trademark, or copyright license agreement must be registered before it can be recorded with Chinese customs – which is particularly important if you want Chinese customs to help with anti-infringement work and if you don’t want them to seize your licensee’s goods.

In general, you want the Chinese side to handle all registrations and for the license not to be effective until they have provided proof of such registration. The one exception to the former is trademark licenses, which are required by regulation to be handled by the licensor. Either way, the license agreement should provide that the license will not be effective until proof of registration is provided. This requirement goes hand in hand with requiring upfront payments, and serves as a good test of whether the agreement was properly registered. Registration takes at least a few days, so if you receive payment on the same day the agreement was executed, you know the agreement was not registered and the licensee is not being straight with you. Though you want the Chinese side to handle all license registrations (except trademark licenses), it is incumbent upon you to make sure that this was actually done.

3. Limit the territory to China. This is not an absolute requirement but often makes practical sense: Chinese licensees will often ask for rights to numerous ASEAN countries, but it generally makes sense for you to make them prove themselves in China before granting them rights to Malaysia or Vietnam or wherever. Also, China may not statutorily prohibit gray market sales, but you can contractually prohibit your licensee from selling extraterritorially via a well-drafted contract provision.

4. Include strong language on confidentiality and IP protection. Your license agreement should make clear that the IP belongs to you, not to your licensee, and that your licensee is not allowed to misuse the IP or to take any actions that would interfere with your ownership of the IP. And upon termination, the IP will all return to you. The proper language is critical to protect you from someone challenging your trademark three years down the road for non-use.

5. Make sure you own the relevant IP. This should go without saying: you can’t license something you do not actually own. But I am still going to say it, because we are regularly asked to help companies license IP they don’t actually own in China. For patents and trademarks, ownership in the U.S. or Europe is of little or no relevance to ownership in China; the way to own IP in China is to register it. Putting this requirement in the license agreement places the obligation on the licensor, but it’s an obligation you should be happy to shoulder.

6. Ensure the agreement is written in Chinese, governed by Chinese law, and requires dispute resolution in Chinese courts. For all the usual reasons.

Any questions?

 

 

China Entertainment LawThe leader of our China entertainment group, Mathew Alderson, will be speaking on a panel at Peking University School of Law on June 21st. The panel is entitled “Looking Beyond: Opportunities and Challenges.” It will be part of the 2nd Annual China-US Entertainment Law Conference, presented by Peking University School of Law, the US Patent and Trademark Office, Loyola Law School Los Angeles, and the Beijing Film Academy. Mathew’s panel will be one of four dealing with current issues in China film, TV, gaming and music. These issues include fair use of live game streaming, copyright protection of live broadcasts, music licensing issues, protection of celebrity names, risk management, and talent agency contract dispute resolution.

The titles of the other three panels are:

  • Year in Review — Recent Developments in the China-US Entertainment Industry
  • IP Issues in the China-US Film, TV, Music and Gaming Industries
  • Other Issues in the Film, TV, Music and Gaming Industries

This is a major event for which the organizers have assembled a great cast of Chinese and foreign experts. For further details see this flyer: US China Entertainment Law Conference.

Go to this link to register.

We hope to see you there.