China Law Blog

In going through old emails this weekend, I came across a rather old email from a long time client/friend, entitled, "You should write about these idiots." I swear this is his language not mine. Anyway, attached was a link to a 2008 USA Today article, entitled, "The Pitfalls of China's Rough Capitalism" that is still very much topical today. The article is about a couple of Americans who purchased dolls from a Chinese manufacturer that were in violation of US copyright laws. The two Americans were sued by an American company that owned a copyright on the dolls and they blamed the Chinese company for having told them it was their own original design. One of the owners of the U.S. company poses this question: "When you're in China, how can you check on copyrights?"

Where do I even begin?

Well, for starters, call or email your US lawyer and simply ask him or her. It is sheer lunacy to rely on a foreign non-lawyer for your US legal advice and that is exactly what these two people did here. Now I am absolutely not absolving the Chinese company of blame for having lied, but if you are going to be doing business in China (or anywhere else for that matter) it is in the end always going to be up to you to protect your own business.

Yet I see this sort of thing all the time. I have "seen" people enter into major deals relying solely on their Chinese counterparts for advice. To wit:

-- US company starts manufacturing product in China and then ships it to the US, only to learn that it contains a chemical banned in the US. Wants my law firm to sue the Chinese company over this because the US company "just assumed" the Chinese company would operate legally. My comments that the Chinese company was operating legally, in China and in about half the world, seemed to fall on deaf ears. We turned down the case.

-- US company told by their Chinese manager (not a lawyer) that 1) no need to pay employee benefits; 2) no need to have a written employment contract; 3) no need to register the business as a proper WFOE; 4) No need to pay China taxes; 5) no need to register the company's trade-name in China. This is an amalgamation of what I am constantly seeing and though this sort of thing may work for Chinese domestic companies, it seldom works long for foreign companies. Chinese domestic non-lawyers are not expert in international law.

-- US company signs English language agreement with Chinese company saying Chinese language agreement will control. US company trusts Chinese company to do the Chinese translation. US company never checks the Chinese translation until it is thinking of suing and, guess what? Chinese contract and US contract are very different. I have seen this twice. Not kidding.

-- US individual believes Chinese girlfriend (sorry, but we have seen about a half dozen of these and all have been girlfriends) that China does not allow foreigners to own property so US individual buys condominium for "the two of them" under the girlfriend's name. Within months, the Chinese girlfriend breaks it off and claims the condo was a gift. US individual is always surprised to learn that making the argument that this was not a gift is going to be extremely difficult because he actually qualified to buy Chinese property and who is going to stand up in a court and say "I did it this way so as to avoid the law, no please compensate me now that it has gone wrong."

-- US company ordered a part to be made of 20% stainless steel. US company did not perform any QC checking before shipment or sale and only learned that the product was about 5% stainless when customers started complaining of rust. By the time we were called in to try to help this US company recover its money, the Chinese company was no more.

-- US company goes "into partnership" with Chinese entity to run a Chinese magazine, but because foreigners are forbidden from doing this, the US company eventually gets pushed out.

-- A company that was going into a Chinese joint venture we knew was structured illegally, but because some low level local government official had said it was okay, the company would be going forward against our advice. We told them we had no interest in representing them.

I can go on and on, but all of the above have one thing in common and that is that the US company relied pretty much entirely on the Chinese company side for advise that probably should have come from anywhere other than the Chinese company with all sorts of incentive for brushing potential problems under the carpet.

I am definitely not telling you never to trust your Chinese partner, but I am saying that you need to verify everything on your own.

And in that spirit, I present you with the second part of the USA Today story, that of Frank Carroll, an Irish "furniture seller," who was a lot smarter in his due diligence and whose story is more instructive. Carroll "worked with a family-run factory" with whom he got so "he was invited to the matriarch's birthday party at the family's luxurious compound with swimming pool and snooker table." Despite this, Carroll's quality control worker discovered that the Chinese manufacturer was using foam that did not meet Britain's flame retardant standards.

The factory owner and his brother at first denied that the contract specified that the product meet the particular British standards and when Carroll showed them that their contract proved otherwise, the Chinese company stalled for time:

Later, the mother, father, three brothers and two of their wives showed up at Carroll's hotel.

"They weren't willing to fix the problem," he said. "They said, 'Can't you sell these chairs anyway? We won't tell anyone. Nobody will know.'"

One of the wives began sobbing and urged him to forgive her husband and take the chairs as a face-saving gesture.

Carroll refused: "Had I been found out, my business would be dead. If one person found out, I'd never be able to trade in the U.K. again."

It wasn't the last time he saw the chairs. "At a furniture fair six months later," Carroll said, "they were selling the chairs at a discount price."

The experience didn't scare him away. The trick is finding good factories and micromanaging them, said Carroll, who splits his time between Guangzhou and Dublin.

Carroll's right. It's your job to micromanage and stay on top of everything.

What do you think?