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Happy Thanksgiving To You Our Wonderful Readers

Posted in Good People

On this Thanksgiving Day, we want to take a bit of a time out to express those things related to China for which we are thankful. Just to be clear, we are focusing on China, not because we think China takes priority over everything else (because it does not), but merely because this is a China blog. So with that caveat, here goes:

1. We are thankful for our readers, here and on our Linkedin and Facebook pages. We are thankful for your loyalty and we are especially thankful for our being able to interact with you. We are thankful for your comments, from which we learn all sorts of new things and from which we are challenged. But most of all, we are thankful and we are honored that you trust us for your information. Before we even started this blog, way back in January, 2006, we wrote the following Mission Statement for it:

We want to start a conversation with, for and about the person who wants practical information on starting and growing a business in or involved with China.

We will be challenging various misconceptions the West has about law in China, including that the law in China does not really matter or that guanxi can supplant it. We will help you figure out how you can use the law as both a shield and a sword. We will give insights to achieve practical solutions, while doing our best to entertain. We know lawyers are not popular, and though we are ourselves really quite likable, we recognize the need to avoid those things that incite lawyer hatred. We will strive to avoid legal jargon and namby-pamby language that attempts to camouflage our views or to avoid controversy.

We want our blog to be a place for both conversation and controversy. We expect many of you will disagree with us much of the time and we are fine with that. We will always strive to avoid boring you or being unwilling to take a stand. We are not going to be afraid of being wrong—in fact, we want you to tell us when and how we are wrong. If you want “legalese” or long strings of caveats, you are going to have to pay exorbitant legal fees to get that elsewhere.

We will tell you more than just that the law is this and this is what needs to be done to comply. We will discuss how the laws as written may say one thing, but our experience dictates something else. We will tell you when you need to do more than just follow the law to succeed, and we will set out exactly what that something else is. We will regale you with stories about the Chinese lawyers with whom we work, the foreign and Chinese businesspeople with whom we deal, and even the places we go. There will be times where our lawyer ethical rules will make us unable to name names, but we will always work to tell the full story.

It has become a blog cliché to implore readers for their input, but it is so important we must join the crowd on this. We do not purport to know everything about Chinese law. That is impossible. Our strengths are forming companies in Chinadrafting international contracts with Chinese companies (in English and in Chinese), intellectual property protection and international litigation and arbitration. We welcome your comments, suggestions and ideas on any area of law relating to conducting business in China. China is anything but monolithic and we will be relying in large part on you, our readers, to round out this site with your own stories.

In plain language, we ask that you write us early and often. We will review your comments before we post them, but that does NOT mean you should not criticize us or disagree with us. Our review will be to filter out comments that are without substance and/or personally abusive. We want to encourage a high level of discussion, but we will not ban or delete your comments just because you come after us.

You, our readers, have exceeded our wildest dreams by not only commenting often, but commenting with intelligence.

2. We are thankful that whenever relations between the United States seem to be on the brink, both countries seem to re-realize the importance of the other and pull back, even if just a little.

3. We are thankful for each and every award we have received, both as China bloggers and as China lawyers because we know none of those would have been possible without you.

4. We are thankful for our (relatively) new firm webpage. We thank the wonderful, talented and diligent folks over at Conflare for this. Hardly a week goes by without our getting a compliment on that. Our webpage better enables us to convey who we are to the world.

5. Most of all though, we are thankful for all the great friends we have made through this blog and through our work, who are far far far too numerous to mention. You are our everything.

Again, thank you from all of us (both in the U.S. and in China) to all of you!

May each and every one of you have a Happy Thanksgiving.

From the Harris Moure China team:

Mathew Alderson

Greg Buhyoff

Steve Dickinson

Ben Dietz

Matthew Dresden

Dan Harris

Arlo Kipfer

Chris Priddy

Li Xuihua

Grace Yang

How To Sue Chinese Companies, Part 4

Posted in Basics of China Business Law, Legal News

This is Part 4 of this series on how to sue a China company. This is the final post explaining what you can do to try to secure redress against a Chinese company that owes you money or has wronged you. Part 1 dealt with jurisdiction and on Hague Convention service of process. Part 2 was on conducting discovery against a Chinese company. Part 3 discussed overall litigation strategies and how to enforce a judgment against a Chinese company. This final post will focus on arbitrating against Chinese companies in the United States and in China and on litigating against Chinese companies in China’s courts.

Arbitration in the United States. China is a signatory to the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards. This means that its courts generally enforce foreign arbitral awards from recognized foreign arbitral bodies. Chinese courts, however, are considerably less likely to enforce foreign arbitral awards obtained by default. Chinese courts also sometimes stall foreign arbitration award cases for years as a way to avoid enforcement while making their enforcement numbers look better than they really are. You will find this most likely to be true if your award if the Chinese courts consider your award to be inequitable or if it is against a powerful company in a small town.

Arbitration in China. China has some legitimate arbitral bodies, with the China International Economic Arbitration Commission (CIETAC) probably being the most prominent. China’s arbitral bodies allow little to no discovery and they oftentimes do not even allow live testimony. Even if live testimony is allowed, you should expect your case to be won or lost on the documents.

If your contract with your Chinese counter-party is going to call for arbitrating disputes in China, it will typically make sense for you to provide for English language arbitration and as many foreign arbitrators as your Chinese counter-party will accept.

Suing in a China Court. If suing a Chinese company in the United States does not make sense (see Part 3 as to why it usually does not), pursuing litigation in China may. Though China’s court system is very different from that to which American lawyers are accustomed, it is more navigable than many American lawyers believe it to be. Foreign companies can and do win cases against Chinese companies in Chinese courts. Before suing in a Chinese court, though, it is important to understand some basics about its court system.

First, though Chinese courts will enforce the law prescribed in a contract, Chinese judges place more emphasis on the overall context and “fairness” of the case and much less on legal technicalities than their American counterparts. For example, if an incompetent or uncaring low-level employee causes a company to violate its contract, a U.S. court would almost certainly hold the company liable for all damages arising from the breach. A Chinese court, on the other hand, might either not find liability at all or severely limit the damages, believing it unfair to penalize a company for the incompetence of one employee.

Second, Chinese courts prohibit nearly all discovery. Companies suing in China without a strong case at the outset seldom prevail. This also means that you should have your proof ready to go before you sue, especially since the time from filing to trial is usually less than a year.

Third, Chinese courts base their rulings almost exclusively on documentary evidence, not testimony. So as we said about arbitration in China, you should be prepared to win or lose your case based on the documents. What this also means is that you need to have your documents ready before you sue or if sued, you had better get your documents ready as soon as possible. This is critical because oftentimes “having your documents ready” means that they have been appostilled somewhere outside China and then consularized by the appropriate Chinese Consulate or Embassy.

We cannot stress enough the need to move quickly in getting documents appostilled and consularized for a Chinese trial. Twice in the last year, American companies have called one of our China lawyers asking how they can appeal Chinese lawsuits they lost because — in their own words — they were not able to get critical documents documents appostilled and consularized soon enough to be admitted into evidence by the Chinese court for the trial.

Fourth, settlement is rare in Chinese business litigation matters. The cost of litigating in China is typically much lower than in the United States, and once a complaint has been filed, settling a case is often viewed as losing face. The Chinese company you are suing may prefer to lose the case and blame it on the judge than to settle and be viewed by its employees and its customers as having been at fault.

Fifth, Chinese courts rarely issue large damage awards, no matter the case and no matter the plaintiff. Chinese companies generally operate at low margins and Chinese courts are loath to badly harm a functioning business or to cause layoffs. In particular, Chinese judges are hesitant to award damages for lost profits or for pain and suffering. Chinese courts simply do not award the sort of damages available in a U.S. court. This is one of the reasons why we so often put liquidated damages provisions into our China contracts. See How To Write A China Contract. Liquidated Damages.

Sixth, though the ability to collect on judgments in China is improving, it is still not near the level of the United States. Chinese courts often lack the authority and fail to receive the assistance from other law enforcement agencies necessary to enforce collection on their judgments. In addition, Chinese companies sometimes find it more cost effective to avoid a judgment by shutting down and re‐opening under a new name. In other words, just as is true in the United States, you should consider the collectability of your judgment before you sue in China, only more so.

China Guanxi: You Don’t Have It.

Posted in Basics of China Business Law, China Business, Recommended Reading

Five days ago, I wrote a post on Linkedin, entitled, China Guanxi: You Don’t Have It.  That post essentially counsels to be skeptical of any foreigner who claims to have guanxi and goes on to discuss why this is so and why guanxi is overrated in any event. The post lists out the following reasons for why guanxi is not as valuable as touted:

No foreigner can create a Chinese-style guanxi network. Guanxi refers to a vast network of connections arising from party, family, and work connections that may go back several generations. No guanxi network relies on a single individual. The elimination of one member of the network is therefore not fatal. Foreigners almost always rely on only one or two individuals for their supposed connection. This kind of network is too fragile to be of enduring value. Foreign investors who think they have created a guanxi network in China are usually deluding themselves.

Connections with local government officials are short-term and can be abruptly terminated. Government officials in China are regularly moved from office to office and from region to region. As a result, any connection you build with a local government official is unlikely to be long-term.

It is common to negotiate a project for several years and then learn that the official in charge has been transferred to a new post. If the project is not in compliance with the law, the replacement government officials often will refuse to sign the documents that have already been negotiated. Even worse, we have seen replacement government officials shut down previously approved and already started projects. If your project depends on the protection of a single individual, you need to be asking what will happen if that person dies, is demoted, or prosecuted for corruption.

A project based on guanxi gives too much power to the Chinese side of the deal. In many cases, the provider of guanxi will use the fact that the project is not in compliance with the law to ask for additional benefits. If the foreign investor seeks help from a lawyer, the lawyer can do little since the project itself is either illegal or poorly documented.

This post has already drawn nearly 100 likes and, more importantly, 46 comments, most of which agree (many vehemently) with the post’s thesis. I urge everyone to go read that post and provide your coments either here or there. Guanxi is a controversial topic and I am of the view that we all benefit by talking about it openly. I urge all of you to go read it.

If you like my guanxi post or if you like this blog, or even if you just have an interest in China (which I am guessing that you do simply because you are here) please join our China Law Blog Group on Linkedin while you are there. We are nearing 10,000 members and I really want to hit that magical number by the end of the year! What separates our China Law Blog Group from the other Linkedin Groups are the following:

  • Great members. Of course.
  • Great discussions. Of course.
  • No spam. This is key. We moderate everything and we do so to prevent wasting your time!

We’ll see you there.

China NDA: A Day In The Life Of A China Lawyer, Part II

Posted in Basics of China Business Law, Legal News

Someone in our China Law Blog Linkedin Group (please check it out and join if you are not yet a member — we keep it entirely spam-free) asked a question regarding an NDA with a Chinese supplier. Someone else in the group responded by referring the questioner to this free online NDA.

I (and most other lawyers) virtually never weigh in on specific legal matters online because it does not make sense to provide legal advice without knowing all of the facts specific to the individual situation, I could not resist doing so here and I did. I had a vision that someone somewhere might actually think that this agreement would work when dealing with a China company and I could not allow that to stand. So I wrote the following:

This online NDA is of ZERO value when dealing with China and I would strongly urge that nobody use it for that. I do not believe any Chinese court would enforce it, and even if they did, it is not clear what there is in it that would help. Do not use domestic NDAs for China as they just do not work! Start by reading China NDA. A Day In The Life Of A China Lawyer.

That post dealt with my response to someone who had reluctantly written me at the very last minute, but only because his client “insisted” that he do so. This person then proceeded to explain why he did not think that he needed me and essentially challenged me to prove my worth before he would even consider hiring me. I did not take too well to his email and I responded with the following, all of which makes equal sense true today:

I hesitate to spend time on this because I do not think that you will retain us both because you have come to us too late for us to fix your NDA (which, quite frankly, does not achieve what you want it to achieve) and because you are neither going to believe nor like what I have to say. So I instead urge you to read  How To Stop Your Chinese Supplier From Becoming Your Competitor and China Contracts. Why Even Bother? and all of the links contained in these.

What you have done so far is unlikely to help you in dealing with Chinese manufacturers. It just does not sound like you have received good advice so far and I have to wonder whether that is because you have been hiring the wrong China attorneys (or no attorneys at all) or if it is because you are not interested in changing how you do business with China.

An American NDA with jurisdiction in Chicago is not likely to have any impact on a Chinese company. What you need is not really a China NDA at all, but an NNN (Non-Disclosure, Non-Use, Non-Circumvention) Agreement that protects you before you have actually chosen a particular manufacturer for your product.  This sort of agreement can go a long way towards preventing potential or future manufacturers from stealing your design.

The ability to sue in Chicago is not likely to give you any power over a Chinese manufacturer. The bottom line is that Chinese manufacturers do not fear foreign litigation as much as they fear being hauled into a Chinese court and hit with liquidated damages (or even worse, a pre-judgment seizure of their assets). The goal with our NNN agreements (and of all our China contracts) is to prevent the Chinese company from doing what you don’t want them to do, not so much to beat them if you end up having to sue.

There is no point in our using your existing NDA as a template because it would take us more time to do that than for us to use our own template and then modify that to suit your current needs. More importantly, non-disclosure isn’t really the risk you face; it’s non compete that really matters and your NDA is completely silent on that. Your biggest risk isn’t your Chinese manufacturer disclosing your product to someone else; your biggest risk is your Chinese manufacturer making your product.

I spent five minutes reviewing your manufacturing agreement and that was enough time for me to determine that too also isn’t close to what you need for China. Honestly, it isn’t close for what you would need in the United States either. It does not mention any penalties for bad quality nor does it set forth any sort of timeline. These two things are the most basic provisions one expects to see in such an agreement. It reads as though a non-lawyer cobbled it together from various contracts on the internet. You probably would be better off with no contract at all.

And there is no way that we can promise you anything by the end of the week because we do not even have a good idea yet of exactly what it is you really need. You are going to need to determine whether you are prepared to spend money to do things right in China contractually or just continue muddling through. You know what I would recommend, but of course it is entirely up to you.

 China NDA Agreements. Heck any China contract. Do not do them at home….
What do you think?

China Trademark Registrations: The Latest News From The Front

Posted in Basics of China Business Law, Legal News

One of our China lawyers sent an email to a client yesterday, updating the client on the status of its trademark filings. I am republishing that email below because it succinctly sets out the current timelines for the various stages of trademark filings in China:

Good to hear from you. We submitted the trademark applications to the Chinese Trademark Office (CTMO) a few weeks ago, and are now just waiting for an official filing receipt from them. These are usually issued within 2 months, but the CTMO has been experiencing a number of delays recently, so I wouldn’t be surprised if it takes even longer. If everything goes smoothly, from that point it usually takes 12-15 months to receive preliminary approval from the CTMO, and then another 3 months after that for the trademark to be registered. Either way it will be a long wait, but the important thing to remember is that because China is a first-to-file country, the fact that you have filed your application first means that no one can cut in ahead of you.

We will keep you updated on the status of your trademark application. Don’t hesitate to contact me should you have any further questions.

There you have it: around 17-20 months from filing to registration.

China Antitrust Laws: Key Developments

Posted in Legal News, Recommended Reading

Last week, China’s Supreme Court handed down what will likely be a seminal antitrust ruling. In the case of Qihoo v. Tencent, Qihoo alleged that Tencent had violated China’s anti-monopoly law, in particular by alleging that Tencent had abused its dominance. This was the first anti-monopoly case heard by the Supreme Court and the Court used its decision to elaborate on many key antitrust law issues. By doing so, this case offers substantial guidance regarding China’s anti-monopoly laws. A number of King & Wood lawyers have written a post, entitled, The Supreme Court Goes Online with Anti-Monopoly Law Principles:A Review of Qihoo v.s. Tencent Abuse of Market Dominance Case, deeply analyzing this case

I recommend you read that post if you have any interest with or concerns about China’s antitrust laws.

 

China and Hollywood — A Front-Row Seat with Clifford Coonan: In Beijing on November 20

Posted in China Film Industry, Events

In his capacity as chairman of AmCham China’s Media & Entertainment Forum, Mathew Alderson, who heads our China entertainment team out of Beijing, frequently invites distinguished guests to speak about media and entertainment issues in China.

This Thursday (tomorrow), November 20, starting at noon in Beijing, Mathew will be moderating a talk by well-known journalist Clifford Coonan, Asia Bureau Chief of the Hollywood Reporter. Clifford will be talking about the relationship between Hollywood and China.” Go here for more information.

We hope to see you there.

How To Sell Your China Manufactured Product Within China Without A WFOE

Posted in Basics of China Business Law, China Business, Legal News

Many of our clients that went into China years ago to have their products made there are now interested in selling those same products within China. One way for them to do that is to form a China WFOE for selling the products, but oftentimes the cost and the hassle of doing that is just not worth it, and there are other ways.

Foreign (non-Chinese) companies often ask our China lawyers how they can sell in China the product they are having made in China, without having to form a China WFOE. These foreign companies typically want to buy their own product from their Chinese manufacturer and then resell their product to a Chinese distributer or to Chinese end users. We usually have two major concerns with this sort of plan. One that VAT will need to be paid for both sales (the sale from the manufacturer to our client and the sale from our client to the distributer) and two, that a WFOE will almost certainly be required.

The key in these situations is to avoid having the foreign entity deal directly with the distributor. Typically the best way to do this is to have the sale made from the manufacturer to the distributor. The goal is to set up a system where 1) the foreign company earns a profit, 2) tax is paid on that profit, 3) the product is transferred to the distributor in way that provides for proper payment of VAT and proper credit for value of the goods for the subsequent payment of VAT by the distributor, 4) title to the goods transfers properly and 5) the foreign company remains in control of the process.

We usually handle these deals as follows:

1. The foreign company and the Chinese manufacturer enter into a manufacturing agreement that protects the foreign company’s intellectual property and deals with all other related manufacturing issues.

2. The foreign company enters into a separate license agreement with the manufacturer. This agreement provides that the manufacturer will sell the product within China to entities (distributors) selected by the foreign company. The sale to the distributors is made at an agreed price that includes profit to the manufacturer and a payment to the foreign company. We have characterized the payment to the foreign entity in various ways. In some cases, we characterized it as a license royalty, in other cases we characterized it as a sales agency fee. The characterization can also influence whether the agreement must be filed with the Chinese government, and where.

This arrangements are not without their complications and the following should be borne in mind:

  • The exact method we use depends on the location of the manufacturer and of the distributor. Different localities have different rules. We make it a point to speak with the appropriate government officials before we draft anything.
  • How to characterize the payment to the foreign company is critical and depends on the facts of the specific case.
  • The manufacturing agreement can be simple or complex, depending on the nature of the product being produced.

 

How To Sue Chinese Companies, Part 3

Posted in Legal News

This series of posts is on how to pursue litigation or arbitration against a Chinese company that owes you money or has wronged you. Part 1 dealth with jurisdiction and on Hague Convention service of process. Part 2 was on conducting discovery against a Chinese company. This post is on litigation strategies against Chinese companies and enforcing judgments against them.

Litigation Strategies Against China Companies. U.S. companies hold many advantages over Chinese companies in U.S. litigation. American jurors generally view Chinese companies unfavorably. Chinese companies frequently try to skirt the discovery rules and if you bring this to the court’s attention the Chinese company is at risk of losing credibility or incurring sanctions. Probably most importantly, Chinese companies tend to underestimate the importance of U.S. trial court decisions, often holding back on vigorously defending a lawsuit until appeal. From Chinese Companies Court Disaster:

Appeals in China are usually de novo, meaning that if a trial court judge disagrees with your version of the facts, you can make another attempt to tell your side of the story at the appellate level. But in the U.S., appeals courts take as a given the trial court’s findings of fact and will hear only disputes about the trial judge’s interpretation of legal questions. This means that in America you rarely get more than one chance to put forth your version of the facts, so you had better do it right the first time. In China the fight often begins only once a case hits the appeals court.

U.S. Judgments In China. U.S. judgments have virtually no value in China. There is no treaty nor any reciprocal arrangement between China and the United States regarding recognition or enforcement of civil judgments. For these reasons, Chinese courts disregard U.S. judgments.

If the Chinese company you are suing has assets in the United States or in another country that generally enforces U.S. judgments (such as the United Kingdom, Canada, or South Korea), suing in a U.S. court may be the best way to proceed. Otherwise, the judgment of a U.S. court may end up being of little to no use. In other words, you should think long and hard before you sue a Chinese company in a U.S. court because spending time and money to secure an unenforceable judgment is seldom a good way to go.

My fourth and final post in this series will address suing Chinese companies in China and in arbitration.

How To Shut Down A China Rep Office

Posted in Basics of China Business Law, Legal News

It is not uncommon for foreign companies that have been doing business in China through a Representative Office to want to shut it down. We get companies coming to us for this from two fronts. We get companies that have succeeded in China and now want to form a WFOE, which is usually in the long run a cheaper and more flexible way to conduct China business. We also get companies that have decidedthey no longer wish to be in China at all, but do not want to burn their China bridges by moving out of China Baltimore Colts style.

What does it take to close down a China Representative Office?

The first thing you must do is submit to the Tax Bureau a properly drafted and sealed company resolution along with a cancellation application signed by the Rep Office’s chief representative, along with various other required documents. Since the documents required — like so much else in China — can vary depending on the locale, you always should  contact your local bureau to determine the exact documents they will require. More than anything, the tax bureau wants to make sure that your Representative Office has paid all of its taxes.

After you are have obtained a cancellation certificate from the tax bureau to close down your Represenatative Office, you must then de-register it with other agencies as well, with those agencies depending on where you are and the nature of your business. China wants to be sure that your Representative Office has paid all of its China debts, including employees.

Closing a Representative Office (or a WFOE for that matter) is more difficult and time consuming than it should be. In fact, it is one of the things on our short list of legal matters that our China lawyers will not do on a flat fee basis simply because the time involved is too unpredictable. Closing a Rep Office can take as little as three months or as long as 18 months, maybe more.