China cyber law
Screenshot of Hangzhou Cyber-court Website, showing its Chinese name as Hangzhou Railway Transport Court as of end of June.

China has adopted a plan to establish a cyberspace court in Hangzhou lately. The plan is for this court to accept filings electronically, try cases via livestream and hear only e-commerce and Internet related cases.

Why Hangzhou? As a general rule of Chinese civil procedure law, lawsuits must be brought in the place of the defendant’s domicile. For companies, domicile means their principal place of business or the place where it has its registered address. Hangzhou is home to Alibaba and to many other technology companies, it has been dubbed the “capital of Chinese e-commerce,” and it is the site of the China Cross-Border E-Commerce Comprehensive Test Zone (中国(杭州)跨境电子商务综合试验区). Hangzhou courts have experienced a considerable increase in the number of e-commerce related cases, from 600 cases accepted in 2013 to more than 10,000 in 2016.

Before these most recent plans for a cyber-court in Hangzhou, the Zhejiang High Court launched a pilot program to create Zhejiang E-Commerce Online Court System to better handle Hangzhou’s increasing caseload in Hangzhou. Three Hangzhou trial courts and the Intermediate Court of Hangzhou initially joined this system to try certain e-commerce related cases online. Other than a different space (cyberspace versus an actual courtroom) for the actual litigation/trials, there are no significant differences between the online court and traditional courts. The Zhejiang E-Commerce Court website explicitly states that its litigation processes will strictly follow China civil procedure law.

What Cases Will the Cyber-Court Handle? The Cyber-court will have general jurisdiction over certain Internet and e-commerce related cases in the Hangzhou area. Although the Cyber-court’s website is currently inaccessible, according to the Zhejiang E-Commerce Court website, the following cases (over which the existing trial courts in Hangzhou would normally have original jurisdiction) will be tried by the Cyber-court beginning on August 18, 2017:

  • Disputes regarding online purchases of goods, online service agreements, and small [online?] loan agreements;
  • Disputes regarding “internet copyright” ownership and infringement;
  • Infringement on personal rights (e.g. defamation) using the Internet;
  • Product liability claims for goods purchased online;
  • Domain name disputes;
  • Disputes arising from Internet based administration;
  • Other civil and administrative cases concerning the Internet assigned to the Cyber-court by a higher court.

No matter in which district of Hangzhou a defendant is domiciled, cases that come within the above list should be filed with the Cyber-court instead of with the trial court in the previously relevant district.

How to file a case with the Cyber-court and Attend trials? Please note that because the Cyber-court’s website is currently offline and inaccessible we have had to base the information in this section on what we obtained from the website back when it was live in July and from news reports. The Cyber-court will use an online platform that allows people to file cases and attend trials. To be able to use this platform, users must first verify their identity and then register for an account. There are two options for doing this. One is to physically go to Hangzhou and show your ID to the court clerk, which to a large extent defeats much of the purpose of having the online court system. The other is to have your identity verified through Alipay (Alibaba’s payment service). If you already have an Alipay account and Alipay has verified your identity (because you probably used Taobao before), such a verification will be accepted by the cyber-court’s system.

Once you have a cyber-court account, you can file a complaint, submit evidence, and request service of process through this platform.

You can attend your trial remotely by entering a verification code on a webpage. Transmission of audio or video of any hearings and trials and the evidence presented and other data exchanges will be encrypted using security technologies provided by Alibaba Cloud.

Implications. For people who do not live in Hangzhou area and want to sue someone there based on causes that are within the Cyber-court’s jurisdiction, the new system sure will make that more convenient. It also will likely make rulings on internet and internet related cases more consistent and thereby give more and better guidance to potential and actual litigants

But I also wonder whether all of what has been put under the cyber-court’s jurisdiction makes sense. Take product liability as an example. How is a product liability claim for goods purchased online any different than that for goods purchased physically in a store? In what will the cyber-court be better able to handle such a claim? There may be difference in online and offline purchase agreements for issues such as where the defendant resides, the place of execution or performance of the agreement or jurisdiction. But those are typically answered by existing product liability law, contract law, and civil procedure law and there is no single “Product Liability Law for Cyberspace.” Do we need a separate cyberspace law or is it just the Law of the Horse? Many countries, including China, have separate maritime and IP courts and those have generally worked well. Does it make sense to have a separate court handle internet disputes? I hate to sound trite, but time will tell. Is this a genuine attempt to reform e-commerce and embrace technology? Will this one cyber-court eventually assume nationwide jurisdiction of internet claims (not likely)? Will other regions in China create their own cyber-courts? What have other countries done on this front? Please comment below if you know!

Does it make sense to have the system rely so heavily on one company’s technology (Alibaba’s)? Did it have any real choice? How secure is Alibaba’s technology as to data and privacy protection? What protections are in place to prevent Alibaba from appropriating and using the litigation data?

Finally, as with most new developments involving cyberspace and e-commerce in China much about the cyber-Court remains  unclear and will likely change, and fast. I will be covering the changes so please stay tuned.

China trademark registration
Do these look similar to you? Because they sure do to me.

We first wrote about the Under Armour vs. Uncle Martian dispute last May. At the time it seemed like just another story about a blatant Chinese ripoff, destined to be forgotten with the next month’s news cycle. But the story has kept on going, and was back in the news recently with the report that Under Armour had conclusively prevailed in its trademark infringement case against Tingfeilong Sporting Goods, the Chinese sports manufacturer behind the “Uncle Martian” brand.

According to Under Armour’s lawyers, on June 19, 2017 the Fujian People’s Higher Court issued an injunction requiring Tingfeilong to stop using the infringing “Uncle Martian” trademarks, destroy all infringing products, pay RMB 2,000,000 in damages, and publish a statement to “eliminate the adverse effect” of its infringement. This ruling followed a preliminary injunction issued on November 2, 2016.

The court’s ruling is surprising in two ways. First, it’s surprising that the court issued an injunction at all. Chinese courts are known for being reluctant to issue injunctions because they don’t have the same enforcement power as U.S. courts (China has no equivalent of the U.S. Marshals Service), and issuing an injunction that they know will be ignored just makes them appear weak.

Second, it’s surprising that Tingfeilong continued using its Uncle Martian logo — the infringement is about as blatant as you can get short of an outright copy, and the social media commentary in China was withering. When I wrote about this case last year, I speculated that Tingfeilong’s strategy was to get a bunch of free publicity for their cheesy product launch and the “Uncle Martian” name, then quietly drop the infringing logo and continue selling products using the “Uncle Martian” name. That may still be their strategy, but the penalty may be enough to put them out of business. Assuming they end up paying it. Tingfeilong has appealed the June 19 ruling, and I could imagine a settlement that involves Tingfeilong agreeing not to use the infringing logo so long as they can still use the “Uncle Martian” word mark. Or maybe other shenanigans are afoot – according to the CTMO website, the “Uncle Martian” word marks are now owned by another Chinese company, Quanzhou Changwan Trading Co. (泉州昌万贸易有限公司).

In an interview with Law360, Under Armour’s US counsel offered three lessons from the case. I’ve paraphrased those lessons below in underlined text, with my further comments afterward in italics.

  1. Chinese courts are willing to grant injunctions. Obviously this case is a step in the right direction, but one case is hardly enough to establish a trend. China is not a common law system and a ruling by the Fujian Higher People’s Court’s does not set a precedent. That we even have to discuss this point is noteworthy; in any court system providing meaningful injunctive relief, this case would be a slam-dunk. But it’s not the case that this sort of relief will be readily and easily available. As I understand it, the key to this case is the significant and indisputable evidence of infringement presented by Under Armour at the time it requested an injunction. To submit that amount of evidence takes a lot of time and effort – it’s not just pasting a bunch of screenshots into a complaint. Note that the Uncle Martian knockoffs were first announced last April, and the preliminary injunction wasn’t issued until November. I’m sure Under Armour would have loved to have a TRO in May – as would have happened in the US or EU — but there’s no way they could have prepared the evidence in time.
  2. Local counsel is crucial. Unquestionably true. Non-Chinese firms are not allowed to practice law in China, so it is legally impossible to proceed without a Chinese local counsel. And as with any case here in the US, the better the local counsel, the better your odds. But as the Law360 article implies, to an increasing degree in China what makes local counsel “good” is not their connections with local government officials or their guanxi but rather their expertise in the legal field at issue. That is: if you have a trademark infringement case, hire a firm that excels at IP and has a history with those cases. 
  3. Chinese courts outside Beijing, Shanghai, and Shenzhen are issuing sophisticated, consistent legal rulings. Again, though this ruling is certainly a step in the right direction, one ruling does not make a trend. And the facts in this case were pretty much served up on a silver platter for the court. It would be a stretch to call this a sophisticated ruling, when it was obvious to just about everyone who commented on social media that this was trademark infringement. Another key point is that if you want any shot at enforcing a court ruling in China, you need to file your case in a court with jurisdiction over the defendant. If the company knocking off your products is based in Xi’an, you probably will need to file in Xi’an, like it or not. It should go without saying that you will be better off filing in a second tier city court that has jurisdiction than getting your case tossed out of a court in Shanghai for lack of jurisdiction. 

I would add one additional takeaway, which is implicit in the commentary on the Uncle Martian ruling and hopefully second nature to anyone reading this blog. The only reason Under Armour was even in a position to file this lawsuit was because Under Armour had already registered its trademarks in China. This was not a case of an American company trying to prove that its trademarks were famous in China; this was simply a company enforcing its trademark rights that already existed.

China attorneys One of our China lawyers got a weird call a few weeks from a somewhat distraught clothing manufacturer who had just learned that products his company was having made in China may in fact have been made in North Korea. This person wanted to know whether if that were the case whether he might go to jail. When we told him we didn’t know whether it would be illegal or not and that much would likely depend on how much his company knew about the North Korea connection and when, he very quickly lost his ardor for hiring us.

I thought of that call today while reading an article entitled, North Korea factories humming with ‘Made in China’ clothes, traders say. The article essentially says that some clothes that bear a “Made in China” label are actually being made in North Korea. And some are being made in China by North Korean “guest” workers. The degree of culpability for this sort of thing usually ranges roughly along the following spectrum:

  • Those who know and approve of their products being made in North Korea yet labelled “Made in China.” These companies no doubt like the cost savings.
  • Those who don’t want to know where their products are made and make zero effort to prohibit their products being made in North Korea and make zero effort to monitor where their products are being made.. These companies no doubt also like the cost savings and courts tend to categorize them as “having known or should have known.”
  • Those who are actually making a reasonable effort to make sure the products they are sourcing from China are not being made in North Korea.

Now without even discussing whether having your products made in North Korea, funding (albeit indirectly North Korea), and receiving products made in North Korea is legal or not — and this will vary by country — how do you want to be viewed if you are ever before a judge or a jury in your home country? Do you want to be seen as the person/company that tried to stop your products from being made in North Korea, the company that affirmatively didn’t care or the company that encouraged? Now before you answer that, ask any lawyer (no matter what the law is) which category of client he or she would rather defend. The answer to that is obvious. When facing a judge or a jury, the company/person that looks the best is the one most likely to prevail.

Just imagine if opposing counsel gets into evidence some of the things from this article, including how “In North Korea, factory workers can’t just go to the toilet whenever they feel like, otherwise they think it slows down the whole assembly line.” Or that the workers get to keep only ⅓ of their wages, which are only half those in China to begin with, and yet work from 7:30 a.m. until 10 p.m., or 14.5 hours. If facing a jury with those facts doesn’t scare you, I do not know what will.

So when it comes to North Korea how can you be good to look good? It’s like just about everything else with China and with manufacturing: you put how you want your Chinese counter-party to act in your contract (and if you want that contract to actually work, you do these things as well) and you monitor as best you can whether your Chinese counter-party is actually abiding by the terms in your contract.

Simple yet not so simple. But really important.

Your thoughts?

 

China counterfeit lawyers
X out China counterfeits

Full disclosure. This post is on more than what to do when your product is being counterfeited in China. It also is on what to do to position yourself so that if your product is being counterfeited in China, you will have real options on what to do.

Barely a day goes by without one of our China lawyers getting contacted by an American or European company telling us that its products are being counterfeited and would we please get so and so — either the alleged counterfeiter or the online site on which the counterfeit products are posted — to remove the offending items. Were it only that simple. We have for years been writing about how our lawyers have a near 100% success rate at getting counterfeit products removed from Chinese e-commerce websites like Tmall and Taobao and the same holds true for American websites like Amazon and Ebay. But our success rate depends largely on the advertised product is truly a counterfeit, as that term is commonly defined by lawyers not businesspeople.

All of the big American and Chinese e-commerce sites, including the Alibaba family of sites (Taobao, Tmall, Alibaba, AliExpress, 1688.com, etc.), have formal internal procedures for removing product listings that infringe a third party’s IP rights. To secure the removal of infringing listings, you must follow their procedures to the letter. Among other things, you must provide documentation proving (1) the IP owner’s existence and (2) the IP owner’s rights to the IP in question. Only after you have submitted these documents and had them verified by the e-commerce site can you even submit a takedown request. When you do submit your takedown request (assuming everything goes smoothly), most e-commerce sites will remove the counterfeit products within a week or so. When things don’t go smoothly with a Chinese e-commerce site (which judging from our volume of phone calls is rather frequently) it is vital to have a person on your side who speaks Chinese, understands Chinese intellectual property law, and is experienced in dealing with the particular Chinese website that is posting your products. This person is necessary to get to higher-level employees at the e-commerce site and explain to them why the listing does in fact violate your IP.

To date, we have succeeded with every takedown request seeking the removal of products that infringe our client’s trademarks or copyrights. But probably half the time, we have to tell the potential client there is no point in hiring us for the product removal. Why is that? The below email from one of our China lawyers who regularly works on takedown matters across multiple websites (both in China and elsewhere) explains.

Every Chinese website has its own takedown protocols, and the key to getting products removed is to follow that site’s protocols. You express an interest in suing these websites and we do not advise that unless and until we have sought to get your products taken down and failed. Lawsuits are expensive and based on our track record in securing takedowns, the odds are overwhelming that we will never need to file one on your behalf. To put things in perspective, we have never filed one. The lawsuit you mention against Alibaba deals a lot more with why so many counterfeit products show up on Alibaba websites in the first place than on Alibaba’s failure to take down counterfeit products once on one of their sites.

You are correct that only the copyright or trademark owner or its authorized representative can make takedown requests. However, sites vary as to the sort of authentication they require for a Power of Attorney and most of the sites know our law firm well enough that they almost never require we provide them with a formal Power of Attorney to achieve a takedown.

The most important thing is that we show proof that you have registered your IP (your trademark or your copyright) somewhere. Some Chinese sites sometimes will take down products with foreign IP registrations, but China registrations are always much better. Technically, China is obligated to recognize copyrights registered in any Berne Convention signatory nation, but explaining China’s WTO obligations to a 21-year-old customer service representative seldom works. And as you can probably imagine, securing the removal of copyrighted IP for which a copyright has never been registered anywhere is even more difficult. This is why gaming/video/music companies so often complain about how difficult it is to secure counterfeit takedowns from Chinese websites. By the time they get their China copyright registration and can submit a takedown request, the damage has been done. How many people will still be downloading today’s big game six months from now? US websites are not all that different.

Another thing to consider is that the more sophisticated/well-heeled the website, the more likely it is that they have a formal takedown procedure. For the smaller websites, we generally have to contact someone directly because there are no instructions on the website or they are hopeless. But unless the website is a pirate site (which is rarely the case), it does not want to be sued for hosting counterfeit or pirated items and so long as we do all the work for them, they’ll be happy to take down rogue products and content.

Finally, you should be aware that once this whole takedown process begins, it’s pretty much ongoing. The pirates and counterfeiters don’t just give up because their first upload got taken down. And even if we stop one or two of the counterfeiters, we should expect more to pop up. This is why companies hire us to monitor and report and after we remove the existing counterfeits, we should discuss what sort of future programs make sense for your company and your situation.. One of the things we can and should do though is try to figure out who is doing the counterfeiting, how they are doing it, and what we can do — if anything — to try to stop it or slow it down.

My law firm has an Alibaba account that makes us eligible to seek removal of links that infringe our clients’ IP. We do this by submitting proof of identification and authorization, as well as information regarding the IP which is being infringed upon. This is accomplished by our providing the following to Alibaba: (i) our client’s “business license,” (ii) any formal IP registration documents and (iii) (sometimes) a power of attorney signed by the client, authorizing us to file the complaint on its behalf. We also submit the following information: the IP registration number(s), the title of the IP, the name of the IP owner, the type of IP, the country of registration, the time period during which the IP registration is effective, and the period during which the IP owner wishes to protect its IP rights. We translate these documents into Chinese to make things easier on the Chinese website company and because doing so greatly speeds things up. After submission, it typically takes Alibaba a few days to verify our information.

Once Alibaba verifies the information we provide, we provide the infringing links and removal virtually always quickly occurs. For complaints concerning patent rights, we also need to provide proof of the connection between the infringing material and the IP being infringed. Alibaba normally takes a few more days to process the complaint, which typically consists of passing along the complaint to the infringing party.

If the infringing party does not respond to the complaint within three working days of receipt, either by deleting the infringing link or by filing a cross-complaint, Alibaba will delete the infringing link. Absent prior written permission from Alibaba, the infringing party would then be prohibited from posting the same information on Alibaba again. If the infringing party files a cross-complaint, we would then need to deny the cross-complaint, and then Alibaba would handle the “dispute.” Alibaba normally resolves such disputes within a few days. As you would probably imagine, counterfeiters almost never file a cross-complaint; they typically just slink away.

We have achieved similar results with China’s other leading and legitimate online marketplaces. But as you would expect, China’s smaller and sketchier marketplaces are more problematic when it comes to IP protection.

If your IP (especially your trademark or your copyright) is registered in China, securing the removal from Chinese websites of products that infringe on your IP can be relatively fast and easy. If your IP is registered in a country other than China, securing the removal from Chinese websites of products that infringe on your IP can be accomplished, but not always. If your IP (your unregistered U.S. trademark, for instance, or your unregistered copyright) is not registered anywhere, your best strategy for securing removal of infringing products is to register it first and then seek removal, rather than to seek removal first. The same generally holds true for US websites, but US websites are a lot less likely to remove products that infringe on your patent rights than are Chinese websites. US websites typically take the position that you need a US court order stating that the product or products infringe on your patent for a removal.

In other words, plan now with your IP filings for takedowns later.

China employment law guide

As regular readers of this blog know, China’s employment laws are very much location based. See China Employment Law: Local and Not So Simple. For this reason, much of what I write about employment law focuses on Beijing and Shanghai and Shenzhen, as those three cities contain the bulk of foreign companies with Chinese employees.

I have of late been focusing on Beijing because it recently came out with new employment laws. Earlier this year I wrote my first piece about Beijing’s new labor laws, called the Responses to Several Issues Regarding Application of Law in Trial of Labor Disputes (关于审理劳动争议案件法律适用问题的解答)(“the Responses”). These new laws focus mostly on adjudicating labor disputes more fairly, effectively and consistently. That post focused on Beijing’s new rules on reinstating employees to their old jobs when an employer’s termination decision has been deemed unlawful. Those new rules essentially say that a Beijing employer that unlawfully terminates an employee must reinstate that employee to his or her previous position unless one of a limited number of circumstances exists that render the original employment contract no longer able to be performed.

In Beijing’s New Employment Laws, I wrote how these new laws indicate Beijing is inching closer to Shanghai by becoming more employer friendly. That post focused on how Article 13 of the Responses allows Beijing employers to terminate an employee who seriously violates labor disciplines or professional ethics, even if the employer’s rules and regulations and employment contracts are silent on the specific employee misconduct.

In this post, I focus on how the Responses reduce a Beijing employer’s ability to terminate an employee on the basis of there having been a “significant changes in objective circumstances.” Before I explain what this will likely mean for you as a Beijing employer, here is a quick summary of the law. The PRC Labor Contract Law allows employers to terminate an employee by providing either 30 days’ written notice or by paying the employee one additional month’s wage, where the “objective circumstances” that gave rise to the employment contract cannot be realized and, even after negotiations between the employer and the employee the parties cannot reach agreement on amending the contract. Employers in China often rely on this ground for terminating employees after a restructuring.

The Responses define “significant changes in the objective circumstances” as changes that cause an employment contract or its main terms to be unable to be performed or would make continued performance unfair (e.g., performance would be prohibitively expensive). These significant changes need to have occurred after the employment contract and have been unforeseeable when the employment contract was concluded. The Responses further provide that such changes include the following situations: (1) force majeure caused by natural disasters (e.g., earthquakes, fires or floods), (2) changes in laws, regulations or policies that result in major changes such as relocation, asset transfer or ending or switching production, or change of state or collective ownership of the employer, and (3) changes of the business scope of employer who is a franchisee.

As noted above China employers would offer fight unlawful employee termination claims by claiming the termination was justified due to significant changes in objective circumstances. Beijing’s Responses suggest this defense will be less likely to succeed in the future for terminations that do not stem from changes in laws, regulations or policies.

Even without Beijing’s new Responses, our China employment lawyers have never been big fans of this defense in Beijing (or in most other cities in China) because it is seldom successful and it is usually expensive to mount. It requires the employer both show  “significant changes in objective circumstances” and that “the parties were unable to reach an agreement on amending the contract” after negotiations. In one case in Shanghai, where the employer’s foreign parent company had sold certain assets and businesses which resulted in ceasing production in China and elimination of the employee’s position in, the court did find that the employer satisfied the first two elements of such a defense by finding that there had been (1) an occurrence of significant changes in the circumstances, and (2) the employment contract could no longer be performed as a result of such changes. But it then found that the employer had failed to produce sufficient evidence regarding the parties having tried to negotiate an agreement on amending the contract. Lacking this third element, the court held the employer’s termination decision was wrongful.

Termination on this ground has also always been limited and, for example, expressly not permitted in any of the following situations:

(1) Being engaged in operations exposed to occupational disease hazards, the employee is not given pre-departure occupational health examinations, or being suspected of an occupational disease, and is in the process of being diagnosed or is under medical observation;

(2) Having contracted an occupational disease or being injured at work, the employee is confirmed to have totally or partially lost the ability to work;

(3) The employee is on medical leave for medical treatment for illness, or for non-work related injury, and;

(4) The employee is pregnant, on maternity leave or nursing;

(5) The employee has worked for the employer continuously for 15 years and is less than 5 years away from the statutory retirement age; or

(6) any other circumstances provided by laws or administrative regulations.

Because it can be extremely difficult for an employer to ensure it meets all the legal requirements related to a “significant change” termination such that it can meet its burden of proof when sued, this termination route is rarely the most effective one to take. As is usually true of employment terminations across the board in China, mutual terminations with settlement agreements and claim releases are the safest route for employers to take.

For more on how best to handle your China employment law matters, I urge you to check out my recently published e-book (soon to come out in paper form) entitled, The China Employment Law Guide: What You Need to Know to Protect Your Company as  a quick and easy China employment law reference for companies with employees in China.

China e-commerceE-commerce for Foreign Invested Entities (FIEs) in China is in upheaval. Beginning with the much discussed liberalization of the investment cap for foreign entities conducting e-commerce business in China, and most recently with the draft e-commerce law, big changes are afoot. This post briefly summarizes the more important changes, briefly assesses their effect in practice, and speculates as to the underlying trends and future developments.

Backdrop. As pretty much everyone already knows, China’s retail e-commerce market has grown massively in recent years.  Matthew Crabbe gives some interesting totals and projections: firstly the Chinese online retail market was worth a total of 120.8 billion RMB in 2008, rising to 6,433.9 billion RMB in 2017, including B2C and C2C sales, with B2C overtaking C2C in 2015.  Cross-border e-commerce (Haitao –  defined as goods sold from outside China into China, not including foreign goods sold within China) as a proportion of B2C online retail was 1.3% in 2011, growing to 4.8% in 2017. This means the market estimate is 303.8 billion RMB in 2017, which is significant compared even to the total US online retail market, for example.

Summary of China’s e-commerce reforms. Since 2001, the Foreign-Invested Telecom Enterprises (FITE) Regulations have contained an investment cap on foreign investment in Value-Added Telecoms Services (VATS) businesses of 50% ownership.   There is now a limited exception to this relating to e-commerce business. The following brief timeline will illustrate the main events:

14 March 2011: China’s 12th Five Year Plan contains a broad injunction for the economy to move from an export-led manufacturing economy to a consumer economy.

7 January 2014: the “MIIT SHFTZ Opinion 2014” made it possible for Foreign Invested Entities (FIE) in the Shanghai Free Trade Zone (SHFTZ) to own a 55% share in for profit e-commerce businesses with nationwide reach, an increase from the previously allowed 50% investment cap for (VATS) business under the FITE Regulations, thus meaning that a nationwide reaching e-commerce entity could be majority foreign-owned.

13 January 2015: the “MIIT SHFTZ Opinion 2015” took the changes in the MIIT SHFTZ Opinion 2014 further, by allowing 100% ownership of an e-commerce business by a Foreign Invested Entity in the SHFTZ.

10 April 2015: Part IV s20 of China’s 2015 Foreign Investment Catalogue made an explicit exception for e-commerce when discussing the investment cap of 50% in VATS business. This change was widely understood as removing the limitations on investment ratio in the nationwide regime for e-commerce FIEs.

7 May 2015: The State Council E-Commerce Opinions contain an instruction to various Chinese governmental bodies to remove the current investment cap for FIEs in e-commerce businesses, expanding the SHFTZ liberalization nationwide. Various simplifications relating to licensing were also included. (see China E-Commerce: The New Rules for discussion of the State Council E-Commerce Opinions.

19 June 2015: MIIT Circular 196 appears to be the implementation of the State Council E-Commerce Opinions, and it allows foreign equity ratios in e-commerce businesses to be raised to 100%, explicitly stating that this is a nationwide extension of the SHFTZ pilot program.

27 December 2017: the Draft PRC E-Commerce Law was published. It applies to all e-commerce business within China, including e-commerce businesses outside China that sell into China. It differentiates between third-party e-commerce platforms (e.g. TMall and Taobao) and other e-commerce operators, such as self-operated retail portals. Chapter 5 deals specifically with cross-border e-commerce. However, detail is lacking, and its main point seems to be that China wishes to promote development of “cross-border e-commerce,” which is defined as “imports and exports of goods or services through the Internet or other information networks’.” Chapter 5 deals in particular with customs clearance, “electronization,” and personal information.

There have also been a number of other initiatives, such as e-commerce pilot zones, for example in Hangzhou and elsewhere.

What is behind the reforms? On the face of it, there seems to have been major progress in opening the Chinese market to international e-commerce operators. As is so often true when it comes to doing business in China, all may not be as it seems. It is hard to ascertain what is happening fore foreign companies seeking to do e-commerce in China, but since the above changes were implemented, very few VATS licenses have been issued to FIES. One example is Heiwado (China) Co., Ltd, a Chinese WFOE reported to have two Japanese shareholders and a market capitalization of around US$50 million, and which has been involved in traditional and online retail in central China for several years. See First WFOE Obtains VATS License From MIIT.

So what is going on?  There are several possibilities.

Firstly, one factor may be “bringing order to the market” and eliminating legal grey areas. Much of the selling of foreign goods online in China has consisted of informal grey-market imports, often brought into China as personal goods in suitcases and then retailed on Taobao via “Taobao Agent Purchasing.” This means goods are entering the Chinese market without the relevant customs clearance, duties, and product standard compliance. China has a strong incentive for bringing this industry within the scope of its regulation.

A related point is that although the FITE Regulations contain strict investment caps in telecoms business, foreign investment in telecoms is in fact pervasive in China, through the controversial Variable Interest Entity (VIE) structure. Another argument is that removing the investment cap for e-commerce companies is a pragmatic move to enable full compliance by foreign-invested e-commerce businesses. Why though bring e-commerce businesses under the regulatory umbrella, but not other internet businesses? One hypothesis is that full compliance in e-commerce is seen as an achievable and desirable medium-term aim, with overall benefits to China, whereas the policy pressure on other areas of the internet pushes in the opposite direction, with no desire to liberalize and allow foreign participation.

It is also important to remember that discussion of “cross-border e-commerce” in China includes outbound as well as inbound e-commerce. In fact, the focus of the policy seems to be on encouraging outbound e-commerce. One much-discussed theme in the development of China’s economy has been inviting foreign partners in, learning from them, then applying this knowledge internationally once it has been digested by Chinese entities. Opening the market with one hand, and yet maintaining restrictions with the other hand gives the illusion of liberalization while allowing domestic companies to dominate the market. With respect to examples like Heiwado, it is really a very minor player. One interpretation could be that an example like this makes little impact overall, and yet helps maintain an illusion that the market is opening.

Interestingly, online selling on domestic Chinese third-party retail platforms like Taobao is now relatively easy for foreign businesses. This in some ways represents an ideal scenario for China. If inbound cross-border e-commerce takes place under supervision of a Chinese entity, Chinese government oversight is much easier and Chinese businesses get a piece of the pie. For the foreign retailer, this is also a low-risk strategy. The availability of this alternative may be a strong factor in the apparent lack of applications for e-commerce VATS licenses by WFOEs. Does conducting standalone e-commerce in China as a WFOE even make commercial sense?

From the point of view of foreign investment in third-party retail platforms, the dominance of the domestic players presents formidable obstacles to the market. It is probably more plausible for Alibaba to take on eBay and Amazon internationally than vice- versa. Interestingly, Alibaba, the owner of Tmall and Taobao, is itself structured as a VIE. See Why Alibaba is good for China VIEs.

Future developments. China’s removal of its e-commerce investment cap has not led to any great increase in market access for foreign investors. It does though fit into a general picture of increased access to the Chinese market for foreign goods, albeit on Chinese terms. Matthew Crabbe’s prediction is that the Haitao market will peak at about 5% of total online retail sales in China. If that is correct, China’s e-commerce gold rush may be largely over, and today’s status quo is also the shape of things to come. The future of China’s e-commerce market lies largely in selling through established Chinese channels.

 

* This post was written by Edward Hillier, a New Zealand-qualified lawyer and researcher. This post is based on academic research he submitted to Anglia Ruskin University in 2017 for his LLM dissertation entitled New Opportunities in Online Retail For Foreign Investors in China. The author would like to thank Matthew Crabbe of Mintel for market and retail industry insight.

China lawyersOne of the joys of blogging is finding gems in unlikely places (pun intended). The gem is a post entitled Jewels Plating Problems: Can You Trust Chinese Factories? I say unlikely because neither (nor I would bet, most of our readers) have much interest in jewels plating problems. Heck, I am not even sure what those are and I wonder whether the writer (who I presume to be French) mistranslated. But I looked at the post because it is a truly excellent blog and the post is actually highly relevant for anyone doing any sort of manufacturing in China. The blog is written by a Shenzhen-based factory auditing company with whom our China lawyers have worked on many China manufacturing matters, and rest assured — for jewels plating or whatever — these people know whereof they speak when it comes to China manufacturing. And this post is no exception.

The post ostensibly deals with how relatively inexpensive jewels (jewelry?) made of brass and plated with gold so often have quality problems. The post then does a great job digging into why this just keeps happening in this industry. This is an industry our China lawyers know well because much of it is based in Qingdao or thereabouts and our firm has long-standing connections to that city. This is also an industry with low profit margins (for just about everybody) and — as President Trump might stupidly put it — a lot of bad hombres.

The post starts out asking “what is happening in this industry? Are they [the Chinese manufacturers] cheating the buyers, or are they simply careless?” It then gives the following three part explanation:

  • Profit maximization with a “calculated risk” approach — what is sometimes referred to as “quality fade.”
  • Reliance on so-called experience — not on facts and objective data.
  • Buyers who don’t define their quality expectations clearly enough.

To which I say, yup.

The post then analyzes/explains each of these three things.

1. Profit maximization with a “calculated risk” approach. Once a Chinese supplier ships its goods, the shipment has usually been approved and paid for and the transaction is fully completed. There are a few reasons for that:

  • High logistics costs
  • The process to return jewels is a nightmare
  • Customs clearance (cost and time) at both the supplier and buyer sides

The above means that China manufacturers try to ship products “as cheap to produce as possible, and yet are likely to be accepted by the buyer. For example, if a buyer is asking for 1um gold plating, the jewels might only have a gold layer of 0.5um.”

2. Reliance on so-called experience — not on facts or objective experiments. According to the post, most buyers are surprised by this. “Chinese factories in general barely have an R&D team. Their expertise is based entirely on their intuition (which they call their “experience”), and unfortunately it can’t be fully trusted.”

Again, I can only assent.

When buyers bring a new case to their Chinese supplier, the supplier tries to remember similar cases. This might work in a factory that has been in business for many years with a stable staff and good problem solving abilities, but it doesn’t work in a small workshop started recently.

3. Buyers who don’t define their quality expectations clearly enough.

The post does not free buyers from at least partial blame. I personally see the foreign buyer as at least partially at fault most of the time. Not saying the Chinese manufacturer is not also at fault, because it usually is, but most of the time had the foreign buyer taken action before the problem arose, there would have been no problem. I wrote extensively on this in China Factory Problems: Always YOUR Fault?

The title is somewhat of a stab at humor. It stems from my blaming most (but certainly not all) China factory problems on the foreign buyer. We have written countless times of what is required to secure good product from Chinese factories:

How To Get Good Product From China; Specificity is THE Key To Your OEM Agreement.

China OEM Agreements. Ten Things To Consider

China OEM Agreements. Yet Another Reason To Have One

China Supply Agreements. Why The “Perfect” OEM Agreement Should Cost Less

OEM Agreements With Your China Supplier. Not Just For The Big Boys

China OEM Agreements. Why Ours Are In Chinese. Flat Out

The Five Steps To Successfully Buying Product From China.]

China Manufacturing Agreements. Make Liquidated Damages Your Friend.

We have also written how our China lawyers constantly get calls or emails from American and European companies that have received bad product from their Chinese factory suppliers and how there is nothing we can do for them. We wrote about this just last week in How To Get Bad Product From China With No Legal Recourse. To a certain extent, we like being able to blame the victim in these situations because that way we as lawyers can comfortably sit back and tell ourselves that had they only contacted us BEFORE they started having problems, we could have prevented all of their problems.

But what about where the Chinese company just up and suddenly shuts down. How can the American or European buyer be blamed for that? Well guess what, they can and in Doing Business In China Safely. The Due Diligence Basics, I explain the following situations where blaming the victim is really pretty easy.

This post rightly blames buyers for not explaining their quality and manufacturing standards clearly enough to their Chinese manufacturers:

In some cases, the buyer asked for the plating to last for at least 6 months or 1 year. That’s better than nothing. But some factories see this requirement, confirm the need for 1um (or sometimes for 0.5um) gold plating, offer a competitive price, and are likely the get the customer’s business.

For a case of greenish effect on the skin, I called and discussed with tens of Chinese factories. The result was surprising. A few (yes only a few) provided real expert feedback. Most of them provided different requirements (some of them scientifically ridiculous) and said “do not worry, we will provide great quality if your client buys from us”.

Plating, be it on jewels or other products, is an expertise area that most factories haven’t mastered. If plating is critical on your product, you might have to acquire the knowledge to guide (or force) your suppliers to be compliant with clear quality standards.

The post then goes on to explain how to be clear with your plating standards.

What this post does not do though is explain the various ways you as a buyer of manufactured goods from China can avoid quality problems. For that, I suggest you read Five Keys To Getting Good Quality Products From China. In that post, I assure our readers that if they consistently do the following five things, they will get good quality products from China:

  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 Manufacturing Agreement. Good contracts ensure that your Chinese company knows what is required of it and what will happen if it fails to provide it. For what constitutes a good Manufacturing Agreements herehere  here, and here. Most China contracts we see are completely worthless, with a good chunk of those being even worse than having no contract at all. See Why Your NDA is WORSE Than Nothing for China and Is Your China Contract Worthless?
  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. 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 want 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 thoughts?

China LawyersI often internally cringe when listening to someone back from their first two week trip to China. Those people virtually always come back raving about the place and talking as though it is flawless. Some amazing combination of Paris and Fiji or something.  That’s fine, but what too few seem to realize — and which I am going to have to write about somewhat elliptically for this to stay up on the net — is that at its heart, China can be a risky country. I am not telling anyone to be afraid or not to go there, but I am saying that it ain’t Kansas.

Directly and indirectly from people who call the China lawyers at my firm and from friends who live in China and from what I read, I am sensing there has been an increase in foreigners getting into legal trouble in China. Criminal trouble. Yes, in nearly all of these cases these foreigners did something stupid . . . but still.

Let’s ignore fault and blame for now and get straight to practicalities. Do not contest your cab fare and then get into a an argument with your taxi driver in China. Because if you end up coming to blows, there is a decent chance you will end up in jail and there is even some chance you will end up in jail merely for not paying. I do not know what the odds are in either situation but I do know that it happens more than most people realize.

The same is true of bar fights. In many countries the police will take both inebriated fighters to jail and release them a day or two later. But in China it is not unheard of for the foreigner to face years of prison time.

What should you do to prevent these sorts of problems? One, let it go. You’ve been scammed out of ten dollars? Put that in perspective and move on. You’ve been dissed by some loser at a bar? Walk away. Disarm that person with humor. Be the rabbit. Two, if you are arrested and given an offer that will involve you quickly getting freedom, consider taking it, because it probably will be the last offer you get. And whatever you do, don’t believe it will all just eventually pass over, because if anything it will get worse. Your Embassy or Consulate will usually do whatever they can to help you, but that oftentimes consists of little more than alerting your relatives and giving you a candy bar or two. It’s not that they don’t want to help or are unwilling to help, it’s just that legally there is very little they can do to help.

Whenever we write posts like this we get comments and/or emails accusing us of deliberately scaring off people so as to pad our own pockets. Wrong. Our pockets get padded the more people go to China, not the less. No, we write posts like this because we do not want to see foreigners (mostly young foreigners) get into trouble in China. So don’t. Please.

There are all sorts of other ways foreigners can and do find themselves behind bars for doing things they never realized could lead to criminal prosecution, and the below posts detail some of them:

Your thoughts?

UPDATE: On a somewhat related topic, Foreign Policy Magazine just came out with a hard hitting article on hostage taking to ensure debt repayment, entitled, Hostage Taking Is China’s Small-Claims Court: Everyone in China — including the police — treats kidnapping as just the price of doing business. Wow.

China trademark lawyersThe New York Times has a story today on Donald Trump’s trademark filings in Greater China, entitled, Trump Company Moves to Protect Brand in Chinese Gambling Hub. And here is something I never thought I would say: there is a lot to be learned from how Donald Trump (or at least one of his companies) is handling things, with respect to China trademarks anyway.

According to the NYT article, “the company that manages the Donald J. Trump brand has moved to protect the name in Macau” by filing for trademark protection there. There are at least five things to be learned from Trump’s Macau trademark filings.

The first lesson to be learned from is that protecting your brand name via trademark registrations in the PRC does not protect your brand name in Macau. To protect your brand name in Macau, you must register your brand name as a Macau trademark. This also holds true for Hong Kong and Taiwan. As I wrote in China And Hong Kong Trademarks. Think Puerto Rico, Mainland China, Hong Kong, Macau, and Taiwan all have separate and independent trademark systems:

Hong Kong and China are the same way [as Puerto Rico and the United States]. And Taiwan and Macau too. I am constantly having to explain this to our clients, at least half of whom just assume that a trademark registration in the PRC operates as a trademark registration in Hong Kong and vice-versa. And who can blame them, since Hong Kong is one with the mainland, right? Same with Macau, right? Many have this same view regarding China and Taiwan as well. None of this is true.

If you want your brand or mark registered and thus protected in China, Hong Kong, Macau and Taiwan, you must register them in China, Hong Kong, Macau andTaiwan. If you thought you were protected in more than one of these places simply because you had registered in one, you had better get moving and start registering in one, two, or three more.

The New York Times article goes on to note that Trump’s filing for trademark protection for Trump hotel and casino brand names in Macau does “not necessarily indicate that President Trump or the Trump Organization will eventually open a Trump hotel or casino there.” This gives rise to the second lesson, which is that it often makes sense to register your brand name as a trademark in China (and elsewhere) even if you are not doing any business there, at least just yet. China is a first to file country, which means that whomever registers “your” brand name there first gets it. So if you are thinking you will be selling your product or your services in China say three years from now, it probably makes sense for you to register your brand and your logo as trademarks there now. See Register Your Trademark In China: Now. Just Ask MikeChina Trademark Basics and Register Your China Trademark Now. Then Register It Again With Customs.

The third lesson to be learned is the need to make sure your trademark registrations are both current and include sufficient classes to truly protect you. Our China trademark lawyers are constantly getting contacted by foreign companies seeking IP protection based on their trademark filings, only for us to have to tell them that gaps in their trademark registrations are big enough for rival companies to drive a truck through or even that their registrations have expired or never existed. The article notes how Trump’s company already owns more than a dozen trademarks in Macau (for casinos, constructions, hotels and real estate) and it is not clear whether it is adding to that total or just re-upping existing trademarks. For the need to stay on top of your trademark filings, check out New Year’s Resolution: Check Your China Registrations. Just last week I got a call from a U.S. company that four years ago paid a company in China to register three of its trademarks there and just learned that despite having received “official confirmation of the approvals,” no such filing was ever made. Needless to say the Chinese company (a fake law firm) that did this no longer shows up on the web nor probably ever really even existed. See Is Your China Lawyer Real? I have no doubt Trump is using a real law firm for his filings.

The fourth lesson to be learned is that once you secure your trademark registration you monitor it to make sure nobody is treading on it and if they are, you do something about it. The article notes how Trump last year “won a legal battle with a Macau company that had registered to use the name ‘Trump’ in coffee shops and restaurants.”

 The fifth lesson is that you should consider securing a trademark that protects your brand in both the English language and the local language. The article notes that Trump’s registrations “include ‘Trump,’ ‘Donald J. Trump,’ ‘Trump Tower,’ ‘Trump International Hotel and Tower’ and ‘Chun Pou’ — a Cantonese version of Mr. Trump’s name.”

Chun Pou, who knew?

Getting money out of ChinaOur China lawyers have of late been getting a massive upsurge in emails and phone calls from American and European companies and lawyers seeking our assistance in determining the strength of their claims for getting paid on indemnification or settlement agreements or for breaches of investment or merger contracts. China’s tightening of capital controls has made getting money out for these things difficult. To get a better sense of the issues related to China’s crackdown on money leaving the country, start with Getting Money Out of China: It’s Complicated, Part 6 and read the first five parts of this series also. And if you think this is not going to get even worse, I urge you to read China regulators plan to crack down further on overseas deals.

A problem in these situations is that the Chinese government may be preventing the money from leaving or perhaps the Chinese company simply has decided it does not want to pay and is using “China government capital controls” as a convenient excuse. Another problem in these situations is that it can be difficult — often impossible — to know whether payment is not occurring due to the fault of the Chinese company or because the Chinese government has blocked it.

Chinese companies virtually never carry insurance for indemnification or for most (pretty much all) sorts of settlement payments and we are skeptical about their getting permission from the Bank of China to convert RMB into dollars for these kinds of payments. This means your odds of getting money for these things are not so good to begin with, but in every instance in which we have been contacted, the American and European companies (and their lawyers) have already done things to reduce their odds of ever getting paid. In most of these cases, our “sense” is that the Chinese companies deliberately had the contracts written to make payment difficult. And why not? What company that has been sued and had to settle for millions of dollars will not try to set things up so that it does not actually end up having to pay? This holds true with equal force on the indemnification side as well. And on the transactional side, Chinese companies tend to encourage contracts that make payment difficult, figuring that if they do end up wanting to complete the deal, they can agree to a revised contract that will make government approval of payment more likely.

We are seeing this problem of non-payment quite often these days in investment deals as well. The Chinese side will enter into an agreement with a foreign company to buy that company or invest in it. The contract will require the Chinese company make an X dollar (or Euro) payment at some early stage and it oftentimes will also include a liquidated damages provision setting forth what will happen if the deal does not close. The Chinese company never makes the first payment, claiming the Chinese government is not letting them do so. The American or European company then wants to sue for breach of contract damages (one company that contacted us even went bankrupt waiting to get paid!) and/or for the liquidated damages. These companies and lawyers often come to the China lawyers at my firm expecting us to bless their pursuing litigation against the Chinese companies, but in most instances, we throw cold water on those plans by pointing out how the applicable contract(s) make prevailing and collecting on any claim difficult or even impossible.

We typically see two main problems in these contracts, one of substance and one of procedure. The substantive problem is that the contracts’ force majeure clause broad enough to be able to claim that their inability to pay due to Chinese government capital controls is a force majeure. And if the American/European company cannot prove non-payment is for some other reason — and as I stated above, this is usually not possible — the Chinese company may very well prevail on this argument. For more on this issue, check out China Payment Risk. And for some ways you can reduce these risks, check out China Payment Risk, Part 2. The typical procedural problem is the dispute resolution clause. See e.g., Enforcing US Judgments in China. Not Yet.

For you to be able to get paid from China in the situations described above, you need to think about how that is going to happen before you draft your contract, not after you have not been paid. This holds true for any sort of contract with a Chinese company that involves payment leaving China. You need to draft these contracts with extreme sensitivity to China’s hard currency controls, otherwise the Chinese company be able to point to the Bank of China as its reason for not paying and then what can you do? You should not enter into any agreement, even one that seems “purely domestic” without accounting for the payment from China issue and for what is required to get paid under Chinese (not domestic) law and practice.