China Law Blog

I spent much of last weekend on an airplane (not an exaggeration!) going through stacks of documents I had been meaning to read for months.  Among these was a big U.S. government Commercial Services print-out I had picked up at a seminar many moons ago.  Darned but there was some good stuff in there and I was planning to post on it in due course. 

Due course became today after I read how Diddy, a well known rapper, entertainment mogul, record producer, and actor, (f/k/a and a/k/a Sean John Combs, Puff Daddy, and P.Diddy), is paying a big price for having violated the first rule on the list of what the U.S. Commercial Services sees as the "Major Causes of Business Problems in China:

• Inadequate vetting and due diligence of Chinese partners, distributors and suppliers.
• Giving away too much in joint ventures.
• Absence of contract clauses guaranteeing licensing compliance spot checks.
• Lack of appreciation of what differentiates a commission from a kickback in the Chinese context.
• Failure to register your IP (patents, trademarks and copyrights) �in a timely fashion.�
• Failure to keep a detailed eye on the always changing legal and regulatory environment in China.

Interesting how many of these (really all of them) relate to the law.

I like this list and I think it appropriate to list a failure to conduct due diligence at the top.  This failure is particularly common among SMEs (Small and Medium Enterprises).  Far too often I see companies entering into transactions worth hundreds of thousands to millions of dollars knowing shockingly little of the Chinese companies with whom they are dealing.  Is it not worth the $2500 to $10,000 to know with whom you are dealing? 

Diddy's China problems are instructive.  Diddy heads up clothing company Sean John, which is now facing a public relations nightmare after it was discovered that the "faux" fur on its coats from China is actually real fur.  This discovery has precipitated a recall of the coats and will no doubt lead to a considerable loss of money and prestige for the company. 

These problems almost certainly would never have occurred if the company had conducted sufficient due diligence on the company from whom it was purchasing its coats and/or conducted quality control monitoring of the product. 

Read the list so as to avoid your own "faux pas."