Kent: So putting you on the spot here, but talk about what are the one, maybe two biggest mistakes from a legal perspective, you see foreign firms, and whether they’re North American or European, what are the biggest mistakes you see them make from a legal perspective, in coming into China.
Steve: Well there are two big mistakes. One is, people don’t plan ahead enough. They think they can just come into China, and just get started, and just figure it out as they work along. That works pretty well in the United States. In China that’s pretty disastrous, because once you start down the wrong road in China, you end up, one, losing a whole lot of money that you can never get back, and two, you’re stuck in a way that you can’t undo. Your second mistake, people make, in all aspects of working in China is not working in a formal way. What I mean by that is, in the old days, in the bad old days, in the early 80s, the registrations and filings didn’t really matter much. It really mattered who you knew, and what kind of relationship you had developed. Nowadays it’s the opposite, and you need to cover yourself with good written material. By written material, I mean contracts, memoranda of understanding, filings. Because, the way the Chinese system works, it’s a very, very classically bureaucratic approach, and if you have the right papers, you win. If you don’t have the right papers, you lose. In the United States, we’re really not like that. We can fill in the gaps with oral testimony, and phone calls and email and that kind of thing.
Kent: Even something as simple as setting a up a corporate structure. Back in my home state of Minnesota I go online to the Secretary of State, register, put my name down, my SSN and Visa card for twenty five bucks and boom! I’m good to go. Here, even a representative office is a mountain of paperwork.
Steve: That’s right. It’s the exact opposite, and I’m sure you’ve met, and you meet people like this, and I meet them all the time, they come to me and say I want to do a representative office, or I want to do a company, but they’ve actually been doing business in China already for nine months, and they say, “well of course I’ll get credit, for all that hundreds of thousands of dollars I spent” and we say, no, you just gave a bunch of Chinese people a whole lot of money and you get no credit at all for it. In fact, the best thing I can tell you is that you won’t be thrown into jail, for having operated illegally. Let alone not get credit for it.
For example, we get people a lot of times who are buying a product from China, just a simple OEM and suddenly a really bad problem happens, and they want to do something about it, and we say, would you please show us the written agreement, and they say, well there is no written agreement, and then we’re dead. Because in the United States, we could go to court, and we could fill that in with a lot of testimony. And in the U.S. we are used to going to court and spending three weeks with just people talking. In China a typical hearing lasts abut four hours and the judge doesn’t want to hear anything anybody has to say. They want to see the written documents. They rule on the written documents, not testimony. So in China, if you have good written documents, you can win, you can prevail against other people just on the basis of having them. The opposite is also true: without good written documents, you are in real trouble in China.
Kent: Talking about going to court, the conventional wisdom for us non-legal types is that, and I’ve heard this and I’ll get your reaction to it, that Chinese law is not based necessarily on precedent. It’s based on the interpretation of the code at the point by the judge, at the point of the activity. Is that accurate?
Steve: It’s not accurate. That’s one of the mistakes about China where China is really, again, between, in that case, the way France say approaches the civil law, and the way the United States does. In France, no precedents. Forget it. The French decisions that are published are three sentences long — to discourage precedents. In China what is done, is, as law is developed, as case law is developed, the Supreme Court, and the local courts select cases, they publish cases. What they don’t do, is publish every case. They don’t want the bad decisions published. So they take the decisions, that are the approved decisions, and they publish those.
Kent: Approved centrally?
Steve: Either by the Supreme Court or the high court in the local area. And those cases tell the judges how to decide. So once one of those cases gets in one of those books, you pretty much know how it’s going to go. It is very strange, however, I’ll agree with you on this, that when you write the brief to go before the judge, you can’t cite those cases, but they’re there, and everybody knows they are there.
Kent: And the judge is going to refer to them, if not specifically, then.
Steve: The judge will refer to it, and if the lower court judge willfully goes against it, in China you have a right to appeal for every case, the high court judge will tow the line because their career depends on not getting too far out of hand with messing with the interpretations of the law. So we can, us people that actually read Chinese, we can actually figure out pretty much what’s going on with the law, once there are enough decisions that have come out, where the courts have had a chance to sort through the issues. So it is much better than France. In my opinion, much better than Germany. For us, American lawyers in China, that only read Chinese cases in Chinese.
Kent: Let’s get to a topic that we brushed on briefly before, intellectual property. Every time someone hears “law” and “China” they think intellectual property. How bad is it really?
Steve: Here we have the good news and the bad news side of things. In the United States, in the 90s, I participated in this process, so I was intimately involved. The United States pressured China very, very hard to adopt a sophisticated modern intellectual property protection regime… in the 90s. For the most part, China did that. I don’t know that they did it because they wanted to or because the United States made them — we made it a condition of China’s entry into the WTO that they fix their intellectual property laws. So the Chinese trademark law, and the Chinese patent law, and the Chinese trade secrets law, is excellent.Well, without a court system to back that up, it wouldn’t mean much, but China invested a tremendous amount of effort, and again, I was involved with a lot of this training during the 1990s in training the judiciary and the prosecutors in intellectual property protections. And in the area of patent, trademark and trade secret, China has done an excellent job, and they have very, very knowledgeable judges, they have very knowledgeable prosecutors, and they have a lot of experience in hearing the cases, then doing something about it.
Again, getting a decision that no one enforces isn’t any good either. China has done a very good job at that. It’s a big problem in this way, because most Americans believe what they read in the newspaper and what they hear on the news and believe that there is no IP protection in China, so American companies are just about the worst of not availing themselves of the protection that’s available to protect IP in China. So, for example, trademark registration in China is very straightforward. It’s a completely different system than in the U.S., but once you obtain a trademark in China it’s very enforceable. Chinese trade secret protection– the Chinese trade secret law is modeled on the American uniform trade secrets act, so it’s very understandable to an American but it requires a written contract. Trade secret protection outside of a written contract is impossible, but with a written contract it can be very effective, but it’s very hard for me to convince Americans to do a written trade secrecy agreement, it’s hard for me to convince them to register their trademarks. So, American companies will tend to come to us after the problem has arisen, and we have to say, if you had filed, if you had registered, if you had obtained a written agreement, you would be in a very strong position. But you didn’t do any of those things, so now you have no remedy at all.
Again, in America, you can kind of create a remedy no matter what was done, based on feelings of fairness, or equity. In China, it’s black and white, you either have the agreement or you don’t. the good news about China is they’ve done very well in those three areas (trademarks, patents and trade secrets), but the bad news about China is in two areas, one, since about 2000, the majority of businesses in China are privately owned, they’re not state owned anymore. So there are many, many, many, private entrepreneurs in China looking for an easy way to make money. Stealing someone else’s intellectual property is an easy way to make money, and so there are a lot of people who are still perfectly willing, to take a chance, even though the legal system is very good, they’re still desperate enough, or crooked enough, or naïve enough, to think it’s still a good way to go. So, in terms of people’s behavior, the behavior hasn’t improved very much, in fact, maybe the behavior has gotten worse, in terms of people really in a very sophisticated way, stealing intellectual property.
Where that comes up the most, in the most common way in China, is I mentioned that trademark protection is good, patent protection is actually very good, trade secrecy protection is good, but copyright is not good in China, still. Copyright means, the things we notice the most in the United states, DVDs, CD ROMs, music, video, and even things people don’t think about much as a copyright issue, but clothing design, like patterns on clothing, on fabric. Those are still a big problem in China, and China hasn’t made a lot of progress in enforcing those rights. What I mean by that is, it’s not a foreign issue or an issue that afflicts just foreign companies doing business in China. China isn’t protecting those rights for its own people, generally, so the music industry in China has terrible problems because of piracy, the television industry has terrible problems, the film industry has terrible problems, the software industry has terrible problems, and if they can’t solve it for their own people, they’re not going to be able to solve it for foreigners. That’s a big problem in China.
But a foreign company that’s not in those areas, that’s not in an area where something can be copied cheap, if it requires work and effort and thought, like patents would require, the Chinese system can be very, very effective and it’s a big change from fifteen years ago. It’s really one of China’s really great achievements, that they’ve done that, but it does require a lot of groundwork, to get through, that we’re finding European companies have trouble with and American companies have a lot of trouble with.
Kent: So the law is good if you follow it, you can get good decisions, from what I hear you saying, in the court, but the enforcement is spotty, I mean you can get local officials to shut businesses down…. ?
Steve: Well that’s the thing, in China, I’m very seldom on the side of the Chinese in these issues, but on this one issue I’m kind of on the side of the Chinese. Their point of view is, we created the system, we have a very good system, but you’re a multi-billion dollar company from the United States, and if you want to enforce it, come on over here and enforce it. We have mechanisms to enforce it. You come on over, you hire Chinese lawyers, you go to court, you do it. Don’t expect our policemen, who have other things to do, to wander around enforcing intellectual property rights on their own. We’re just not going to do that. Forget it, we are not going to do it. And I see their point. I walk a fine line on this, but in my own personal knowledge, I don’t know of any foreign companies who have come to me and said, hey, I came to China, and I attempted to enforce my intellectual property rights, my existing intellectual property rights, and I was unable to do so even though I used the right Chinese lawyers to accomplish this. No one has ever told me that. They’ve just been sitting on their behind in some office in New York expecting some policeman on the beat in some little town in China to be enforcing their rights.
Kent: Sending emails, and threatening letters in English from their lawyers over there and…
Steve: Yeah, that’s not going to work, and the Chinese aren’t really interested in doing that. There’s only one area in that that I’m on the US side on, which is again, the massive copying of software, and DVDs and music onto CD ROMs. There’s no explanation I’ve received on why that’s not been shut down in China. And I have my ideas on why it goes on…
Steve: Well, most of it goes on in south China, in large factories in south China, and I think the Chinese government doesn’t have the power to shut it down.
Kent: Those guys are too well locally collected, and…
Steve: Too big. One mistake people make about China, which there’s an assumption in the West that the Chinese government has a uniformly strong power base throughout China and that’s not true. There are parts of China where the central government in Beijing doesn’t have strong ability to impose its will on the local folks, and the farther you get from Beijing, just by natural… the way things work in the world, the farther you get from Beijing, the less likely the Beijing authorities will have the power to, to impose their will. The Chinese government doesn’t’ like to talk about that a lot, so that doesn’t come up a lot in high level discussions of these issues.
Kent: We have a saying in our company it could be the inverse Beijing ratio; the farther you are from Beijing the easier it is to get something done. We’re doing a deal, we have two deals, one in Beijing and one down south, well, it’s going to be squirrelly down south, but you can get away without…
Steve: Well that’s not true. As a lawyer, I sort of work on the reverse of that, if people say, well, I want to go to court and enforce my rights, I say, the farther you get from Beijing the more likely you are to have problems, or the farther from Shanghai. Shanghai is very much a tow the line kind of place, the farther you get from Shanghai, the harder it gets. That’s one of the things about the costs of doing business in China, you can get in easier the farther you are from Beijing, but what have you gotten yourself into? That’s what we see a lot too, is that the front end of a lot of transactions in China is that, again, this is one of the mistakes people make, is they’ll come to me and I’ll say you have to do A,B,C,D,E, F and G, you know it’s a long list in China, and they’ll say, well down there in some little god-forsaken place in the South they told me all I have to do is A. And I say, yeah, you’ll get a certificate, you know, that says, you’re there with just A, but then what’s going to happen, what’s going to happen later, what real rights do you have, how can you enforce them?
Kent: Going through A just gets you the brick to tie around your ankle, and then you just take a jump, and you’re good to go.
Steve: Exactly, and there’s no incentive, a lot of times when you’re working with people in China, there’s no incentive for the people you are working with to make sure you have a lot of strong enforceable rights. So the people you are working with will say don’t listen to that guy, you don’t need to file your trademarks here, we’ll take care of it, don’t worry about it, we’ll pay for it, we’ll take care of it, don’t worry about it. Oh, do a trademark assignment? You have to file that with the government, and then they know about it and it gets taxed. Don’t worry about that, don’t bother, and so they look at me and they look at them, and they say, well yeah, don’t bother, they must know better than some American, so they go that path and then two years later, they have nothing, and they reap the problems later.
Kent: That’s such a good point that there are standards, and yet there are regional interpretations of those standards, and you may be able to do something once, under a local interpretation, but – you probably use this saying, what bad happens if. What bad happens if my intellectual property goes out the window what happens if this partner goes south, what bad happens if this part of the market shuts down, and doing that kind of contingency planning. Hopefully kind of raises it up a level a little bit and says, ok, we’ve got to make sure all our ducks are in a row before we start doing this.
Steve: That’s one thing about China, and the way China is right now, is that no business advisor, who is trying to get you in China, who is a local person, will advise you to protect yourself very well. It’s just not their style. What they will advise you, is how to get in as easily and simply as possible. Because they don’t suffer from the five years down the road disaster that happens, they get their benefit, and telling you about a lot of trouble isn’t anything that’s to their benefit.
I had a guy I was working with, in a city I will leave unnamed, very close to Shanghai, most cities close to Shanghai follow the rules to the letter. There’s this one city, where they decided to quit following the rules, and so it was a company formation issue, which meant, I had to do A,B,C,D,E,F, G and this guy came in and said hey, the local official told me I don’t need to do any of that, and I’m going to do that. You can stop, I’m going to do it this way. He said you know, in China, it’s who you know that matters, not all this legal nonsense. He told me that. Because he knows, he’s been in China for two weeks. He knew, it was who you know. Well, a year later, the whole set of government officials in this town, they’re in prison, because they were doing these things illegally, they knew they were doing it illegally, and they did it anyway, and it was in Jiang Xu, and the Nanjing government came in and said, hey, what’s going on, we just looked at all this, and every one of these things you’ve approved in the past year, has been illegal. They threw them all in jail, and caused everybody else that was legal a whole bunch of trouble because we had to redo a lot of things because the government wanted to make sure that we had done it right. That happens all the time in China, and that’s the kind of mistake people make– who do you listen to? And there’s a tendency to listen to the “good” news over the right news.
Kent: Well you also want to take the path of least resistance and when it comes to law, it’s an interpretation issue. Well, thank you very much, we appreciate your time. Steve Dickinson, China lawyer with Harris Bricken, based here in Shanghai, if you’d like to get a hold of Steve, why don’t you give them your email address,
Steve: It’s steve at harrisbricken.com. To put in an extra plug, you can find us on our China Law Blog as well, at www.chinalawblog.com.
Kent: I should have mentioned, China Law Blog is one of the best blogs out there, and we’ve benefited from it as well. Again, Steve thank you very much, and thank you for listening to the China Business Podcast, we’ll see you next time.