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The FCPA And China. Be Afraid. Be Very Afraid.

Posted in Legal News

The FCPA Blog recently did a post, China dominates the corporate investigations list, in which it listed out the number of ongoing FCPA (Foreign Corrupt Practices Act) investigations by country. This list appears to have been compiled using company disclosures so there are no doubt a number of investigations not reflected by it.

Nonetheless, it is a very useful list and what stands out (but is not the least bit surprising) is China’s dominance. The top five countries by number of ongoing FCPA investigations is as follows:

  1. China 37
  2. Russia 7
  3. Brazil 7
  4. Libya 6
  5. Poland 6

The post explains that Libya shows up so high simply because Ghaddafi’s recent overthrow allowed a review of government documents. The post calls Poland’s presence an outlier, but we disagree. Or should I say that one of my law firm’s lawyers disagrees. James Yrkoksi spent about twenty years as a lawyer in Poland and in his view Poland’s inclusion makes complete sense as so many American companies base their Central European operations there. Indeed, a growing number of American companies are basing their European operations there due to its educated and yet relatively inexpensive workforce. In other words, Poland makes the list simply because so many American companies are there.

And China makes the list for the same reason, along with the added reason that so many Chinese companies are embedded with government employees. Prevalence of corruption is obviously another factor.

If you are interested in your company not adding numbers to the above list, I urge you to read Doing Business In China Without An Anti-Corruption Compliance Program? Are You Crazy? and How To Do Business In China Without Jail Time? Kill A Chicken.

China Anti-Spam Laws

Posted in Legal News

If you have a China mobile number, you are no doubt getting at least one spam text a day. If your website is in Chinese or if you have a Chinese domain name, you are no doubt getting at least one spam email a day as well. So what I am about to tell you will probably come as a surprise to you, but China has (on the books anyway) some pretty tough anti-spam laws.

I was reminded of this when reading the post, Email Marketing and China’s Anti-Spam Laws, on the China Marketing Tips Blog.  The post points out the following regarding China’s anti-spam laws:

Here is the brief summary of the requirements for promotional emails (which is defined to include any email containing any type of advertisement), according to the post:

  • Verifiable Permission. Chinese law requires email recipient provide explicit permission to receive a mass mailing email and that permission must “be verifiable and stored indefinitely in case of an audit.”
  • The Word “Ad” Must Be In The Subject Line. Mass emailings must have the word “Ad” (in Chinese) in their subject line.
  • Content Restrictions. The Regulations on Telecommunications lists “thousands of words and topics that are currently banned and the list is very dynamic.”

Bottom Line:  Think twice (and check at least once) before sending email solicitations to anyone in China.

China’s Changing Economy And You

Posted in China Business, Legal News

One of our China lawyers got the following email this week (modified a bit to avoid any identifiers):

I am certain you hear this everyday…”my supplier has disappeared with my deposit.” For the first time in 20 years it has just happened to me. We are a small family business in Illinois importing promotional products from China for many years. I have been dealing with one trader since 2007. She sources almost 50% of my products and always delivers quality, on-time shipments.

She has since disappeared with my deposit from an order placed in February. Can you please advise me what steps I can take to recapture the funds? As far as legalities are concerned who can I contact and where do I start? Any insight you can provide would be greatly appreciated.

We promised we would respond to the above email here on the blog, so here goes.

First off, we do not hear this every day. In fact, during good times, we might go months without hearing something like this. And during good times, when we do hear something like this, it pretty much never involves a long-time relationship. But during downturns in China’s economy we get an email like this just about every week and too many of them do involve long-time relationships.

And we are in a downturn in China’s economy right now. Sort of.

Back in 2012, I wrote an article for the Wall Street Journal, China’s Slowdown and American Business Hardly a week goes by without complaints about payment problems or bankrupt debtors, with the purpose of warning American companies to increase their guard and to react accordingly. What I said in that article applies 100% to what is going on in China right now.

I started out warning about how China tends to increase regulation of foreign companies during downturns and we are certainly seeing that again:

Take regulation. The best assumption to make is that the Chinese government will respond to the slowdown by attempting to minimize citizen discontent so as to keep its hold on power. The government is much more concerned with social harmony than with economic numbers.

The government is encouraging wage growth—including a greater-than-normal tolerance for union-style labor activism at foreign-owned factories—even though higher wages make China’s factories less competitive. The calculation is that citizens happy with their higher wages will far outnumber those unhappy and unemployed because rising wages forced uncompetitive factories to close. American companies should no longer assume that the government will welcome low-wage manufacturing with open arms.

We are seeing this.

I wrote of how “China’s prioritization of its citizens’ contentment … [means] that China is going to get tougher on foreigners, just as it (and nearly every other country) has always done when times are tough. Everything foreign businesses do will be under heightened scrutiny”:

The authorities also are throwing new roadblocks in the way of foreigners seeking to form businesses in China. Such higher standards are not uniformly applied. Beijing and local governments are ever more eager to distinguish between “contributing” and “noncontributing” foreigners. Thus, it has never been easier for well-funded, nonpolluting foreign companies to secure approval to operate in China. Conversely, it has never been tougher for foreign companies that pollute, pay low wages, or have no plans to hire Chinese employees to get their foot in the door.

I then pretty much spoke to the email above:

The slowdown also is changing Chinese company interactions with foreign companies. Chinese exporters, particularly those that compete with companies from lower-wage countries like Vietnam and Bangladesh, are suffering—in particular in very low-tech, very low-wage industries such as textiles, clothing, shoes and low-end electronics and toys.

Foreign companies that do business with Chinese companies in these industries must be on their guard. Hardly a week goes by without my law firm getting a call from a Western company experiencing problems. Sometimes the Western company has paid for a product and the company it paid no longer exists. Sometimes the company still exists but it needs “more money” from the Western company to buy raw materials for the product it already promised to produce.

Now back to the real issue. What can foreign companies do to avoid problems in China stemming from the downturn? Wish I had something new to add from my article, but I don’t, so I will just quote it:

Foreign managers need to understand what is happening in their own industries within China. This might mean visiting your Chinese co-party’s factory, warehouse or office to look for warning signs of a company in distress. Or it might mean taking out insurance to cover your China business or transaction. A number of Chinese manufacturers are owned by Taiwanese, Singaporean or Hong Kong companies, and sometimes it is possible to secure guarantees from the foreign parent.

The key is to be proactive: If you find yourself in a bad situation with a Chinese company going under, there usually is no remedy after the fact. Bankruptcy in China more often than not consists of a company shutting down in the middle of the night and its owner fleeing to another town.

The key to weathering China’s slowdown will be for foreign companies to go back to basics: think afresh about what a company contributes to China’s economy and how that is likely to shape policy makers’ opinions; focus on scrupulous regulatory compliance; and renew focus on due diligence at a company-to-company level. Above all, no Western company doing business in China should blithely assume that a slowdown won’t affect it.

Yeah great, but what is this Illinois company to do in terms of getting its money back. Well one thing it should not bother doing is contacting the U.S. Embassy or Consulate, as we explained in Have A China Business Problem. Consulate Says “Don’t Call Us.”

The way my firm’s China attorneys analyze a matter like that of this Illinois company is by looking at the dollars and cents. If this company is out $5,000, probably the best thing it can do is not to spend any more money. It can keep trying to reach its sourcing agent and if it eventually succeeds, it can try to pressure her to return some or all of the funds. But for an amount that small, it probably does not make sense to spend any money on an attorney in China and it certainly does not make sense to spend money on a U.S. attorney. I cannot imagine a U.S. attorney taking such a small matter on a contingency fee and our experience (with considerably higher dollar figures) is that Chinese attorneys will be equally reluctant. On top of that, the filing fees in Chinese lawsuits are relatively high and what good is suing someone if you cannot even find them?

But if this were a million dollar matter (and we have been contacted on those), our advice would be entirely different. In those cases, we encourage the American company to retain my law firm and then we in turn will figure out the company’s best options for recovery. This typically involves our reviewing all relevant documents and then sketching out a collection plan that typically involves our bringing on a Chinese law firm (only a Chinese licensed lawyer can appear in a Chinese court) to pursue litigation or alternative means of collection.

The most difficult cases for us are those between $50,000 and $200,000.  In those situations, we do not generally think it makes economic sense for the American company to hire our law firm, yet at the same time, there has been too much money lost to suggest that the American company just walk away. We usually give companies in these situations the following three options:

  1. Walk away.
  2. Find and hire a Chinese lawyer on their own.
  3. Hire us to work up the case and then hire a Chinese lawyer and either walk away at that point or stay on to assist.
These are not easy cases….
Sorry.

 

 

 

Negotiating With Chinese Companies. The Pros And Cons of MOUs.

Posted in Basics of China Business Law, China Business

We have a number of times written on the problems that can arise from using memoranda of understanding (MOUs) with Chinese companies. See the following for some of those posts:

Mostly we have talked about how Chinese company (and to a large extent Chinese law and courts) are much quicker to view an MOU as the contract itself than are American companies and American courts. Because of that, we warned of the dangers in using an MOU.

Since we did these posts though, we have received a number of emails from readers saying essentially that they are having trouble completely eschewing MOUs in their China business and asking us what they should do. Also since that time, our China lawyers have probably done around a deal a month that involved an MOU. In other words, like them or not, MOUs are a fact of life when it comes to doing business with China.

That being the case, in this post we address why MOUs so common to China business and how you can and should handle them, short of just saying “no” and walking away.

MOUs are common with China business for the simple reason that Chinese companies love them. But why do Chinese companies love them? In our experience, we see them used typically to achieve the following two things:

  1. To memorialize in writing the existing state of the agreement before the underlings at the Chinese company pass it on to their boss or bosses for approval. We frequently see this at large Chinese companies, particularly SOEs.
  2. To memorialize in writing the existing state of the agreement and then to use that written document as a starting point for additional negotiations intended to favor the Chinese company only.

If you are negotiating with a Chinese company that insists on an MOU, you should try to discern the reason the MOU is so important and if it is for reason number two above, you should make clear that once the MOU is signed, you will not be in a position to re-negotiate critical terms and you should stick by that statement.

Let’s face it, China MOUs are sometimes necessary for getting the deal done and an MOU that gets a good deal done is a positive/pro. On the flip side, they can be used to lull foreign companies into going beyond where they wanted to go on their deal and as we have previously written, to create a binding agreement without the foreign company realizing that.

Those are the pros and cons of MOUs with China.

What do you think?

China Challenges U.S. Antidumping Policies In WTO

Posted in Legal News

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

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

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

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

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

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

China Trademarks. Register Them In China Not Madrid.

Posted in Basics of China Business Law, Legal News

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

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

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

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

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

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

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

Subclass 4101 – education

Subclass 4102 – organizing educational, cultural, and recreational activities

Subclass 4103 – library services

Subclass 4104 – publishing services

Subclass 4105 – sports and entertainment services

Subclass 4106 – animal training

Subclass 4107 – otherwise uncategorized services.

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

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

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

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

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

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

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

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

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

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

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

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

China Design Patents. Because They Work.

Posted in Legal News

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

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

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

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

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

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

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

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

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

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

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

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

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

Posted in Uncategorized

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

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

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

China Expats Gone Bad. A Review Of Unsavory Elements.

Posted in Uncategorized

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

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

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

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

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

 

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

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

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

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

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

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

As Earnshaw explains:

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

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

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

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

Mr. Carter elaborates:

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

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

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

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

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

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

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

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

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

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

Posted in Basics of China Business Law, Legal News

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

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

How’s that you say?

Let me explain.

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

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

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

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

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

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

 

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

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

Ms. Spors says probably yes.

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

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

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

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

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

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

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

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

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