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Registering Your Trademark In China. The Questions We Ask.

Posted in Basics of China Business Law, Legal News

I was just cc’ed on an email from one our China IP lawyers to a client. The email is essentially an introductory email to a client that just retained us for China trademark work. The email asks the basic questions to which we need answers to efficiently and effectively figure out what we should be registering as trademarks in China.

Here it is:

Good to meet you.I will be working on your China trademark matters. I know that you have already discussed some initial matters with us, but I like to start at the very beginning so everyone is on the same page. To that end, please answer the following questions:

  1. Please provide the full name and contact information for the entity that will own the China trademark.
  2. Does the above entity have a Chinese name? If so, please provide it. If not, we will provide one for you. (The Chinese Trademark Office requires that every applicant filing a national trademark application use a Chinese name.)
  3. Do you have any trademark registrations or pending applications anywhere in the world? If so, please list them.
  4. Please describe, briefly, what you will be doing in China. Will you be manufacturing? Selling products or services? Something else
  5. Please list any trademarks that you will be using in China, distinguishing between words and graphic logos. Please also distinguish between the trademarks that you would like to file an application for now, and those that you would like to hold off on.
  6. To the extent that you are using graphic logos as trademarks, please attach a copy of those trademarks, in both color and grayscale, in either jpeg or pdf format.
  7. Please describe briefly the products or services with which the marks are associated. Please note that for products, the material used is relevant: for instance, a product made of metal may be treated differently than one made of PVC or vinyl.
  8. How will you be using the trademarks? To the extent that you will be manufacturing or selling products, please describe how the trademarks will be affixed to those products and/or their packaging. If you have photos of the trademarks as used on goods and/or packaging, that would be helpful.

After I hear from you on the above, I can then prepare a more narrowly focused set of questions.

I look forward to working with you on this matter. Don’t hesitate to contact me should you have any questions.

That’s it.

Vietnam Remains Attractive to Foreign Investors

Posted in China Business

No, we are not going to become the Vietnam Law Blog, but I (Dan) just could not resist using this post today. This post was written by Greg Buhyoff, who heads up our Vietnam practice and essentially commutes between Vietnam and the U.S. Greg wrote this post for our law firm blog, but when I saw it there, I realized it belonged here as well, because it relates to China and, in particular, to the “China plus one” strategy that so many companies have or are at least considering.

 

Having lived and worked in Vietnam for nearly ten years and continuing to act for clients in that country, I constantly monitor the foreign investment environment there. I was in Vietnam (mostly Hanoi and Ho Chi Minh City) last May when Vietnamese rioters, sparked by anti-Chinese sentiment following China’s installation of an oil rig in disputed waters in the South China sea, attacked several hundred foreign-owned factories in a few provinces outside Ho Chi Minh City. Ironically, the biggest targets were not  China-owned factories, but factories owned by Taiwanese,  Hong Kong, and Singaporean investors whose companies play vital roles in the complex supply chains on which so many foreign-owned manufacturing entities in Vietnam depend.

The foreign business community immediately scrambled to assess the situation. Will Taiwanese, Hong Kong and Singaporean investors pull out of Vietnam and not come back? How will the complex and sensitive supply chains be affected? What will foreign investors from the U.S., Japan, Europe and other countries do? What are the implications for foreign investment in Vietnam?

Four months later, having just returned from yet another Vietnam trip, I am convinced that Vietnam has weathered the fallout from the May riots. Through July of this year, foreign direct investment in Vietnam hit $6.8 billion, up 2.3% over the same period last year and the Asian Development Bank predicts the Vietnamese economy will grow 5.5% this year and 5.7% next year. Not bad given the current state of the global economy.

According to a survey by the American Chamber of Commerce Singapore and the US Chamber of Commerce, the results of which were released last month, Vietnam remains second only to Indonesia among ASEAN countries as a priority destination for future U.S. business investment. 75 percent of the Vietnam respondents (made up mostly of American companies) expect their Vietnam businesses to expand and 57 percent expect their workforces to grow in 2014. 66 percent of the respondents see their profits increasing in 2014 and 82% predict profits to increase in 2015.    Even Chinese, Taiwanese and Hong Kong businesspeople remain bullish on Vietnam. On September 29, 2014, the South China Morning Post reported that “investors including those from China have resumed operations in Vietnam” since the riots, noting that “government efforts to maintain peace and the underlying strength of the economy have managed to retain capital in the country.”

What gives? I see the following as some of the key reasons why Vietnam has done so well lately in terms of foreign investment, and why it is likely to do so well going forward:

  • Riots are not likely to recur. The Vietnamese government, which was caught off guard and embarrassed by the riots, has “gotten the message” and has made clear that such lawlessness will not be allowed to happen again
  • Vietnam remains attractive. Vietnam’s relatively low cost labor force, personal safety, stable government and favorable geographic location combine to make Vietnam attractive for foreign investment, particularly in comparison to other countries in the region. Taiwanese, Hong Kong and other companies affected by the riots neither want nor need to relocate to Cambodia and Bangladesh, as some were reportedly considering.
  • Improving  infrastructure. Though Vietnam’s less than ideal infrastructure remains a problem for many foreign investors, the pace of improvements has increased and foreign investors seem willing to remain patient. Construction has commenced on Ho Chi Minh City’s first subway line and the government recently announced a plan to build new expressways and railways and to improve its airports and seaports by 2020.
  • The Trans Pacific Partnership (“TPP”).  Though it is unlikely we will be seeing a final TPP Agreement within the next year or two, this will eventually happen and when it does, Vietnam will be one of its biggest beneficiaries. Vietnam is already considering a Draft Decree Implementing the Customs Law, which reportedly will include common commitments in the TPP and the EU-Vietnam Free Trade Agreement, as well as the WTO Trade Facilitation Agreement. Vietnam is warming to free trade.
  • The Vietnamese government is becoming a better “listener.” In an apparent concession to Japanese enterprises that are considering relocating their production lines from China to Vietnam, the Vietnamese government has postponed implementing restrictions on importing used machinery into Vietnam. Foreign businesses are seeing this sort of thing and they appreciate it. Again, Vietnam is warming to free trade.

The foregoing mean that Vietnam will remain an important country for foreign investment and one of the leading “China Plus One” countries for companies seeking to expand their business in Asia.

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

Posted in Legal News

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

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

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

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

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

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

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

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

 

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

Posted in Events

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

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

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

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

Posted in Basics of China Business Law, Legal News

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

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

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

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

See….

 

China Government And China Business. It’s Different.

Posted in China Business, Legal News

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

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

But it really is a more complex than that.

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

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

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

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

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

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

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

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

What have you seen out there?

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

Posted in Basics of China Business Law, Legal News

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

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

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

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

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

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

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

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

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

 

 

 

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

Posted in China Business, Recommended Reading

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

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

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

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

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

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

Yep, that nails it.

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

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

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

It then has this to say about the IP challenge:

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

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

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

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

Why Alibaba Is Good For China VIEs

Posted in Legal News

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

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

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

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

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

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

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

The risks of VIEs just decreased.

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

Posted in Basics of China Business Law, Legal News

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

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

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

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

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

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

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

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

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

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

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

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

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