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Dan Harris is internationally regarded as a leading authority on legal matters related to doing business in China and in other emerging economies in Asia. Forbes Magazine, Business Week, Fortune Magazine, BBC News, The Wall Street Journal, The Washington Post, The Economist, CNBC, The New York Times, and many other major media players, have looked to him for his perspective on international law issues.

Not entirely sure why, but in the last couple weeks our China lawyers have seen a massive increase in emails and phone calls from North American companies seeking our help in dealing with defective products/quality control problems. In this post, I explain what you (and they) need to have in place to avoid these sorts of problems in the future, and to make it possible to resolve such problems should they occur. Our China attorneys also have been receiving an unusually high number of emails and phone calls from companies being pursued by Sinosure, and I will discuss how to deal with that in a future post.

My theory is that this slew of calls is due to two things. An increase in QC problems at China factories due to rising costs. Whenever costs rise for China factories quality problems rise as well, until such time as the China companies can increase their prices to their foreign buyers. This influx of bad product calls may also simply be due to the time of year; it may just be the end of 2016 hangover. I note that our last bit tick in these calls was in February 2016. What makes this year’s version so much more interesting for us anyway, is how many of these new matters involve Internet of Things products and how woefully unprepared these companies are to deal with these problems.

I am going to try to avoid getting all preachy here, but I truly do believe that all of these companies could have avoided their bad product problems had they had a good contract in place with their China product supplier. Only one of the companies that have contacted us so far this year had any contract at all with their China factory, and that one contract called for all disputes to be resolved in the U.S. Court of the American buyer, and as we have discussed constantly on here, that is 99.99% of the time a non-starter. In Four Common (And Somewhat Deadly) China Law Mistakes To Avoid, I briefly (for me anyway) gave a real life example as to why this is such a bad idea:

A lawyer calls us with an airtight $2 million dollar breach of contract lawsuit against a Chinese company. This lawyer had drafted a contract calling for disputes between her client and the Chinese counter-party to be resolved in Boston Federal Court and she had already sued the Chinese company in Boston and secured a default judgment against it. She was now seeking my law firm’s help in domesticating the judgment in China, and It was clear she expected us to jump at the opportunity to take the case on a contingency fee basis.

That is until we told her that China does not enforce U.S. judgments. Ever.

She then came up with the idea that we start all over by suing the Chinese company again in China. We had to tell her that could not work because the Chinese court would have two strong grounds for throwing out that lawsuit. First, improper jurisdiction because the contract clearly called for the lawsuit to be in Boston. Second, res judicata because the entire case had already been tried (and won) in Boston (the proper jurisdiction). I have no idea how she explained all this to her client.

American lawyers commonly assume that what makes sense for a domestic transaction necessarily also makes sense for an international transaction. Boston would have made sense in the above instance if the counter-party had been in Los Angeles, but the rules and the issues are different when doing business internationally.

If you check out this post, China Contracts that Work, you will see that what is needed for you to have a manufacturing contract that works is for that contract to be in Chinese with a provision calling for disputes to be resolved in a Chinese court under Chinese law. Your manufacturing contract should also contain a liquidated damages provision and a mold protection provision (so that the factory does not keep your molds if there is a dispute, and be properly chopped/sealed by the Chinese side. It is also critical that your contract be with the right Chinese company as Chinese companies are notorious for signing agreements with an essentially empty shell company, usually based in Hong Kong. If your contract satisfies all of these things, the odds of your having a manufacturing problem go way way down. And if you have such a contract and you do have a problem, your odds of being able to resolve it with your Chinese factory without having to contact a China law firm for legal assistance go way way up. And in those rare instances where you do need to engage a China attorney to assist, that attorney will be well positioned to resolve your problem relatively quickly.

One more thing. Whenever someone contacts our law firm with a problem with their factory, one of the first things we always ask them is whether they have secured China trademarks for their trade name and their brand and their logo. We then explain how common it is for Chinese factories (they actually have someone else do the filing for them) to go off and register YOUR brand name and YOUR logo as a trademark so that they can use this as leverage against you or so that they can keep making your product with your brand name and your logo and sell that product in any country in the world where you have not protected them with a trademark. Sadly, about half the time we are too late and the trademarks have already been registered to someone else, making it difficult or even impossible for the foreign buyer to continue having its products made in China. For more on this critical IP issue, check out When to Register your China Trademark. Ask Tesla and China: Do Just One Thing, Trademarks. So if you have not already registered your brand names and logos in China, you should do this IMMEDIATELY and you certainly should do so before you complain to anyone there.

China trademark Lawyer
Don’t be late with your China IP renewals

Every so often one of our China IP lawyers will get an email from a foreign company (usually a North American or European or Australian company) whose China trademark registration (usually) or China design patent registration (sometimes) did not go as expected. And every so often, one of our China IP lawyers will discover that a trademark our new client paid to have filed in China was never filed. Not to mention the times foreign companies pay to have their trademarks registered in China, only to later learn that the whole thing was a complete scam. In an article entitled Is Your China Lawyer Real, I discussed fake China law firms:

We have many times represented companies that paid money to a Chinese “law firm” for registering a trademark in China or drafting a    manufacturing agreement or forming a WFOE, only to learn that they had instead paid money somebody who had set up a temporary website with the sole intention of bilking the unwary. I have never heard of a real Chinese lawyer doing this. The trick is knowing who is a real lawyer and who is not.

I then discussed the sort of due diligence you should undertake before hiring a China lawyer, or any other lawyer, for that matter.

As more foreign companies are getting to the point where they need to renew/extend their China IP, our China IP lawyers are getting an increasing number of emails involving trademarks or design patents that were filed properly ten or so years ago, but the attorneys/law firms that handled the original filing are no longer around to mind the store. The below email (with a few slight modifications to preclude any identification) is fairly typical of this new breed of problems with which we are having to deal:

Here is one that you may not have come across.

In 2006 I took out a trademark for a product we make through a law firm in Shanghai. It was a small office off Changle Lu and they were very helpful and seemed to know what they were doing. Today I had reason to check the validity of the trademark and noticed that it had expired. I don’t remember anyone talking about this and so rang the attorney’s office to check on what we should do about this. It turns out that the person I was dealing with left in 2009 and the owner of the firm died soon after. They were supposed to send out a renewal notice, which I am sure they did not. They say they did, but our address and phone numbers are unchanged and nobody has died either. It is just another one of those China things. I understand that I now have to go through a special approval process because I did not apply for renewal within six months before its expiration.

I was very new to China when I did this and was quite naive about this sort of thing, believing that I was in the hands of professionals before I realised that they are very thin on the ground here. Also we had yet to set up our systems in the office and so we did not have any automatic reminders popping up, so I accept that it is partly my own fault (but in 2006 I had much more pressing things to occupy my mind). Can you help us on this new go-round?

Fortunately, this particular company came to us in plenty of time to fairly easily remedy this minor misstep. But we are aware of other foreign companies that have lost or compromised their China IP protections by having missed IP filing deadlines.

Bottom Line: Choose your China IP counsel wisely and consider maintaining your own IP calendaring system as well. And don’t be late.

China manufacturing agreementsWhen we first began drafting manufacturing agreements for clients outsourcing their manufacturing to China, one of our China lawyers would send the client a six page questionaire to tease out the client’s China manufacturing plans. But no matter how hard we tried, there were almost always important questions our client either did not understand or unable to answer. We quickly realized that dumping six pages of questions on our clients was too much, especially since a particular answer to one question might mean a few other questions had become irrelevant.

We met with legal tech people to see about using technology to simplifying the process but we soon determined that would hardly help at all. These are not the sort of contracts that can be automated. Rather these contracts require the China attorney working on the manufacturing agreement to be in constant “live contact” with the client to help the client determine what makes sense for its industry, its company, and its product. So we instead switched to a system where we ask questions in “waves.” When we get answers to the first wave, we review those answers and ask a second wave and we keep going until we have all the information we need to start drafting the contract. We then draft the contract in English for our client to review and then we draft it in Chinese as the official version, with an English language version as a translation for our client. See Get Your China Contracts Written In Chinese, Not Translated and How To Draft A Contract For China. This has also become our standard operating procedure for our China NNN Agreements and our China Product Development Agreements as well.

I thought of all this today while reviewing a client’s email response to the first wave of questions for its China manufacturing agreement. The answers made so much sense that drafting wave two of questions will be a breeze. I am going to share this first wave of questions because they should make for a good starting point for Western companies seeking to determine how to have their products manufactured in China. Note that even our first wave of questions is tailored to the specific client so a few of the below questions are not relevant to every industry, company or product.

This is ____________ from Harris Bricken. I will be drafting your manufacturing agreement for China. To kick off this project, I have some preliminary questions. I will have other more specific questions based on your answers.

1. I note from your website that you have an extensive product line. Which specific products from that line do you want this manufacturing agreement to cover?

2. Do you have a specific set of factories in China with which you are already working? Or do you want this manufacturing agreement to be used for new factories? Or both?

3. In what PRC region(s) are your factories located?

4. When you work with factories, do you set a specific product amount on an annual or other fixed basis? Or do you work on a per purchase order basis, with no fixed annual order amounts?

5. What is your pricing arrangement with the factories? Is there a set price fixed for a specific period? If there is a set price, how is that price level enforced?

6. What are your payment terms? Do you pay an initial deposit? When is the final payment made?

7. How do you provide for submission and maintenance of samples? I know that in your industry, products are normally made in reference to a physical sample, rather than to a drawing or CAD diagram or similar. What system do you use?

8. What is your system for inspection and quality control? Do you inspect during production? Prior to shipment? After you receive the products in the United States and in Europe? After delivery to your customer? What is the specific system for dealing with defective/non-conforming product discovered at any of these four points in the system?

9. Do you have a system for dealing with inspection and related specific safety standards in place in the U.S. and in Europe? For example, flammable fabrics, non-lead paints, small pieces on toys and related. If so, what is the division of responsibility between your company and the Chinese factory?

10. Do you have a system for dealing with the quantity of orders made over time? Since many of your products are seasonal in demand, do you have some form of scheduling system to ensure that the factory will have capacity to deliver your orders during peak seasons?

11. What is your procedure for packaging and shipping? What are the shipping terms? How is pricing linked to shipping terms? To where is the product shipped? To your warehouses in the U.S. and in Europe, or directly to your customers?

12. I understand that you distribute some of your products for sale in China. Have you considered how the China side of your operations might impact this agreement, if at all? If we can ignore the China entity/sales issue at this time, that is fine, but we should discuss this.

13. I understand that you have been having products manufactured in China for more than a decade. What specific problems have you encountered that you want your new manufacturing agreements to resolve?

If you would like to discuss any of these matters over the phone or by Skype, and I would be pleased to speak with you.

For more on what goes into China manufacturing agreements I urge you to check out Having Your Product Made In China: The Basics on Protecting It and You and the links within that post.

 

China Lawyers

Commercial real estate company Jones Lang Lasalle (JLL) has come out with a ranking of cities worldwide by “momentum.” JLL researchers use 42 factors to evaluate world cities on the move and their rankings do at least somewhat jibe with the sense I have regarding the cities I know. Their ranking of the top 30 cities is as follows:

1 Bangalore
2 Ho Chi Minh City
3 Silicon Valley
4 Shanghai
5 Hyderabad
6 London
7 Austin
8 Hanoi
9 Boston
10 Nairobi
11 Dubai
12 Melbourne
13 Pune
14 New York
15 Beijing
16 Sydney
17 Paris
18 Chennai
19 Manila
20 Seattle
21 San Francisco
22 Shenzhen
23 Delhi
24 Raleigh-Durham
25 Mumbai
26 Hangzhou
27 Los Angeles
28 Dublin
29 Nanjing
30 Stockholm

So as you can see, Shanghai comes out on top among China cities at #4, Beijing clocks in at #15, Shenzhen at #22 and Nanjing at 29. I was a bit surprised not to see Shenzhen at the top of the China list, because without a doubt, our China lawyers have been seeing a greater increase of work from there than from any other city in China. See Shenzhen, China, 24/7, and the Internet of Things. But who are we to quibble.

What most struck me (but did not surprise me one bit) is how well Vietnam’s two largest cities did in this ranking, with both Ho Chi Minh and Hanoi in the top ten. Beyond China and Vietnam, India and the United States do best in the rankings overall, with India contributing two cities in the top ten (Bangalore at #1 and Hyderabad at #5) and four more cities ranked between 10 and 30. The United States has three cities in the top ten and an additional eight cities ranked between 10 and 30.

What are your thoughts regarding the above ranking?

China WFOE lawyerLast week I wrote a post on how our China lawyers have been receiving a steady onslaught of calls from American companies with “employees” or “independent contractors” in China, but no China business entity. The onslaught has continued, and now I know more about why.

China banks (owned by the Chinese government) are providing information to China’s tax authorities regarding account-holders who consistently receive money from foreign companies. China’s tax authorities are apparently going to these individuals and pressuring them into spilling the beans on why they are receiving their funds from overseas. Upon learning of a foreign (usually American) company that has “employees” or “independent contractors” in China, the Chinese government pounces.

If you are a foreign company operating in China without a China WFOE and you are trying to figure out what to do, your choices are relatively simple and stark.

But before I talk about your limited choices, I feel compelled to explain again why it is that so many foreign companies are still operating illegally in China. Chinese law limits hiring China-based employees to only Chinese legal entities. This means that if you are an American software company, you cannot hire someone in China to do your coding or to provide your support services. This means that if you are a Australian company selling widgets, you cannot hire someone in China to sell widgets for you. This means that if you are a British company that has your products manufactured in China, you cannot hire someone in China to do your quality control for you.

Any person (as opposed to a registered China business entity) performing employment-like services for you in China is your employee because China does not recognize independent contractors in anything other than extremely limited circumstances (and your circumstances do not qualify!). And Chinese law requires you pay both employer taxes and benefits on that employee. These employer taxes and benefits vary from city to city, but they usually total around 40 percent of an employee’s salary. China also mandates employers withhold around 15 percent of their China-based employees’ wages for individual income taxes. But those companies that do not realize they have employees in China are not doing that withholding either. Then on top of the employer and employee taxes, the foreign companies with employees in China are almost always going to be viewed by the Chinese tax authorities as “doing business in China” and that is because they almost always are. The foreign company is now almost certainly liable for having failed to pay its corporate taxes as well.

So when all is said and done, the foreign company owes a heck of a lot of taxes to the Chinese government, plus steep penalties, plus interest. Needless to say, the Chinese tax authorities salivate over collecting these taxes and interest and penalties.

In my previous post, I noted two common ways companies operating in China without an entity get caught:

One, we are hearing of long loyal “contractors” going to their employers and saying that if their employer does not double or triple their pay, they will report the foreign company to the Chinese authorities because their doing so will get them a tax amnesty (and perhaps even a portion of the taxes collected?). We are also hearing of vendors with whom the foreign company has no beef making essentially similar threats. Two, and most importantly, we are hearing that the Chinese government is poring over bank records and questioning people (your “employees”) who regularly receive funds unreported funds from overseas.

It is the second way of getting caught that is steeply rising.

What then should you do if you are right now operating in China without a Chinese company. You have essentially the following three choices:

  1. You double-down in China by getting legal. Quickly, but very carefully. If you want to operate in China for the long term and you can afford to do so, you form a Chinese company, almost certainly a WFOE. For a flavor of what this involves, check out The NEW Steps for Forming a China WFOE. Note that it is not inexpensive to form a WFOE and if you do so you will need to start paying your employer taxes and you will need to start withholding your employee taxes and you will need to pay income taxes to the Chinese tax authorities on the income you earn in China. If you are going to choose this tact, you should do so immediately because in our experience, if you get caught before you even commence the process of forming your China WFOE, your chances of avoiding having to pay back taxes are slim to none. But if you can  at least get going on forming your China WFOE, your chances of avoiding having to pay back taxes are shockingly good. But not only should you get legal fast, you should get legal in a way that neither tips off the Chinese government about your previous (illegal and untaxed) activities in China and in a way that works for both your vendors and your “employees.” If just one of your vendors or “employees” believes that your China changes will make things worse for them, you are at great risk of being ratted out to the Chinese tax authorities and seeing your China operations collapse.
  2. You ditch China entirely. If you either do not want to get legal in China or cannot afford to do so, your best course of action is to simply cease everything you are doing in China and leave. Doing this tends to anger vendors and “employees” and it certainly does not guarantee that you will always be safe from the Chinese tax authorities. So if you do this, we strongly recommend that neither you nor any of your foreign employees go to China for a long long time, preferably ever. For why this is so, check out How To Avoid Getting “Detained” in China and Why Your Odds are Worse than you Think. Both you and any of your foreign employees linked to your illegal operations in China are at risk both from your vendors/employees and from the Chinese government.
  3. You make your stand and you die a slow (or a quick) death in China. A third option is to just keep doing what you have been doing in China and do it until caught and closed down. Just as with ditching China entirely, if you do this you and your foreign employees should not go to China again. The added risks of doing this are that your China vendors and employees may seek to take advantage of your situation. Here are some of the examples of this that we have seen:
  • A vendor learns from one of your “employees” that you are not operating legally in China and uses the threat of informing on you to the government to raise prices.
  • Your employees use the threat of your illegal operations to get an increase in salary. I know you are probably thinking that your employees are also at risk for getting caught for not paying taxes, but trust me when I say that this is a classic case of asymmetrical warfare and if you think their risks/costs as a Chinese individual are anything approaching yours as a foreign company, you are just flat out wrong.
  • Your employees literally take over your China operations, leaving you with nothing in China. This is most common when your China personnel are designing or developing something for you for eventual sale, be it a physical product or software. The following two egregious examples nicely highlight how this sort of thing can happen. The first was a U.S. software company that for more than three years paid for an office in China and paid fifteen people to develop a piece of software. Then, when the software was finally completed, rather than turn it over to the US company, the China employees started selling it themselves. The US company came to my firm wanting to sue but how could it and for what? The other example was a US company that used its China operations to source and to oversee the manufacturing of licensed products for a very large US entertainment company. The US company owner was denied a visa to go to China and his employees in China used that as an opportunity to take over the China operations and they did so pretty much without missing a beat. They went to the US entertainment company and offered to continue with “business as usual” but at prices 20 percent lower than they had been. The US company said yes and the US company owner wanted us to sue. But sue whom and where and for what? How can you sue someone in China when you have never had a company there and everything you have done there has been completely illegal?

The above three options are your only reasonable choices, but we have twice heard of an additional option from potential clients, which really is not an option at all. Two companies under extreme pressure from their vendors/employees have made clear to us that none of the above three options are acceptable to them and they want our China lawyers to engage in what they call the “political” or “guanxi” option. Are you kidding me? Are we supposed to do the following:

Hi, we represent Company A. Company A is an American company that has been operating 100% illegally in China for the last _____ years. Despite having _____ [number] of employees in China, Company A has never paid an RMB in employer taxes nor has it ever contributed even one single RMB in employer benefits. On top of this, it has failed to withhold employee taxes and it has not paid anything in income taxes either. But despite these criminal law violations and despite it having no intention of even trying to get legal, we think it makes sense for you to not only allow Company A to continue flaunting Chinese law, but to lean on the vendors/employees with which Company A is having disputes.

Perhaps what they mean by politics/guanxi are bribes, but we will not even go there with them. There is no way any of my firm’s lawyers are going to risk jail time in China and the United States for anyone. Just no way. And of course, they shouldn’t either.

Oh, and note that a Hong Kong company is NOT the equivalent of a PRC company. For purposes of the above, it is the equivalent of having a United States company and having a Hong Kong company will NOT help you avoid the above problems, not even in the slightest. See Having A Hong Kong Business Does NOT Make You Legal in Mainland China and A Hong Kong Company Is NOT a Mainland China Company and a Hong Kong Trademark is NOT a Mainland China Trademark.

Bottom Line: If you are a foreign company operating in China but you are not on the gird there, get legal or not, but don’t be stupid.

 

 

China lawyersJust read a post over at the China Law Prof Blog on what Professor Clarke rightly calls “an interesting case in which a Chinese court (the Nanjing Intermediate-Level People’s Court) enforced a Singapore court judgment.”

Professor Clarke then goes on to explain how Chinese courts “may enforce foreign judgments that are not fundamentally offensive in some way under two circumstances: (1) there is a treaty with the foreign country calling for mutual enforcement of judgments; or (2) on the basis of reciprocity, which has been interpreted to mean that the foreign country has a practice of enforcing Chinese judgments, or at least has done so before.” This has been the law in China for quite some time.

Clarke then states that there is no Singapore-China treaty calling for mutual recognition and enforcement of judgments, which is my understanding as well. But — and this is the kicker — the Nanjing court nonetheless decided to recognize and enforce the Singapore judgment because in 2014 a Singapore court had enforced a Chinese judgment. And get this: the judgment the Chinese court enforced was a default judgment against a Chinese corporate defendant. I say “get this” because courts everywhere are far more reluctant to enforce default judgments (typically given out because the defendant failed to appear or defend) than to enforce a judgment on the merits of the case.

Professor Clarke does not know if this is the first foreign judgment Chinese courts have enforced on the basis of reciprocity and I too do not know whether that is the case. Professor Clarke does add though that he thinks “it’s fair to say that such cases are pretty thin on the ground.” To which I will add, yes that is for sure.

Now here’s the million (actually probably billions) dollar question this case raises: does this mean China will start enforcing U.S. judgments? I mean U.S. courts have enforced Chinese judgments (my law firm haas secured such an enforcement order) so does this mean Chinese courts might do so if the case is right? Professor Clarke has this to say on this question:

But if I were trying to enforce a US judgment in a Chinese court, I’d certainly bring it up. To the best of my knowledge, Chinese courts have not yet enforced a contested US money judgment. (I’m attaching those qualifications because they may, for example, have recognized a US divorce decree for some purpose.)

Just a few months ago, in Enforcing US Judgments in China. Not Yet, I said “no way”:

At least once a month, one of our China lawyers will get a call or an email from a U.S. lawyer seeking our help in taking a U.S. judgment (usually a default judgment) to China to enforce. The thinking of the U.S. lawyer is that all we need do is go to a China court and ask it to convert the U.S. judgment into a Chinese judgment and then send out the Chinese equivalent of a sheriff to the Chinese company and start seizing its assets until it pays.

As we have consistently written, nope, nope, nope.

I then went on to talk about how my firm’s China lawyers are often called upon to conduct research on this very issue (oftentimes for lawyers or companies wanting to prove to their insurance company or to a court that it would be futile for them to pursue enforcement of their United States judgment in China) and I pulled a large section from the latest of our memoranda on that topic, and I do so again below.

Article 282 of the PRC Civil Procedure Law, requires all of the following conditions be met for enforcement of a foreign judgment to be recognized in China:

The foreign judgment has taken legal effect in the jurisdiction in which it was rendered.

The country where the deciding court is located has a treaty with China or is a signatory to an international treaty to which China is also a signatory or there is reciprocity between the countries.
The foreign judgment does not violate any basic principles of Chinese law, national sovereignty, security, or social public interest.

Though China is a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, it is not a signatory to any international treaty on the recognition and enforcement of foreign court judgments. There is no bilateral treaty between China and the U.S. on recognition and enforcement of foreign court judgments. There also is no bilateral treaty between the two countries on civil or commercial judicial assistance.

Even judgments from countries that have an enforcement treaty with China, are oftentimes not enforced in China. For example, China and Australia entered into an agreement on reciprocal encouragement and protection of investments in 1988 that mandates both countries promulgate laws recognizing and enforcing each other’s judgments. But in response to a 2007 request by the Guangdong Province High People’s Court for instructions regarding an application by an Australian plaintiff for recognition and enforcement of an Australian court judgment, the Supreme People’s Court of China (the “SPC”) rejected enforcement since there was no international treaty to which China was a signatory nor any treaty between China and Australia on mutual recognition and enforcement of court judgments, nor any reciprocity between the two countries, the application should be rejected.

Since China is not a signatory to any international treaty on recognition and enforcement of foreign court judgments nor is there any treaty between China and the U.S. regarding judgment enforcement, the only possible way to get a U.S. judgment enforced in China would be if there were reciprocity between the two countries, but there isn’t.

In considering the question of reciprocity, a Chinese court will consider whether there is any precedent indicating reciprocity. In other words, the court will seek to determine whether there are any prior cases where a U.S. court recognized or enforced a Chinese court’s decision. If there are no examples of a U.S. court having enforced a Chinese judgment, the Chinese court will almost certainly rule against enforcing the U.S. judgment because the reciprocity requirement will not have been met.

In 1994, the Dalian Intermediate People’s Court considered a Japanese party’s application to recognize and enforce a Japanese judgment and two rulings. The application was eventually referred to the SPC for guidance and the SPC held that given that there was no multilateral or bilateral treaty governing such matters between China and Japan and given that the two countries had not established reciprocity, the Japanese judgment would not be recognized or enforced by a Chinese court. This case confirms China requires factual reciprocity, not presumed reciprocity.

But are there any examples of a U.S. court enforcing a Chinese Judgment? On August 12, 2009, the United States District Court for the Central District of California issued a judgment enforcing a $6.5 million dollar Chinese judgment against an American corporate defendant under California’s version of the Uniform Foreign Money Judgments Recognition Act and in 2011, the Ninth Circuit Court of Appeals affirmed the district court’s decision. The plaintiffs in that case were Hubei Gezhouba Sanlian Industrial Co. Ltd. and Hubei Pinghu Cruise Co. Ltd., two PRC companies located in Hubei Province. The plaintiffs won a judgment against Robinson Helicopter Company Inc., a California corporation, at the Higher People’s Court of Hubei Province. The United States District Court for the Central District of California held that the PRC judgment was final, conclusive and enforceable under PRC laws and the plaintiffs were therefore entitled to an issuance of a domestic judgment in the amount of the PRC judgment.

This was the first time a U.S. Court recognized and enforced a PRC judgment, but it does not necessarily mean a Chinese court will automatically invoke the principle of reciprocity and recognize and enforce a U.S. court judgment. First, the enforcing court in that case is in California (though it was federal court), and the laws usually differ from state to state in the U.S., so it’s uncertain whether a Chinese court will deem the U.S., as a country, to have established a reciprocal relationship with China. Second, since the enforcing court was a federal court, it’s also not clear whether a Chinese court will deem a state court’s judgment enforceable in China. Third, the enforcing court is not the U.S. Supreme Court, thus, a Chinese court may not deem it to amount to reciprocity at the highest judicial level between the two countries. Finally, that case involved a U.S. defendant who had previously argued that only China had jurisdiction over the case, so it hardly could be deemed unfair for a U.S. court to rule on enforcing the Chinese judgment.

Chinese courts tend to be more willing to recognize and enforce foreign divorce judgments involving Chinese citizens so they don’t have to initiate a separate divorce proceeding. However, since this is not a divorce case, it almost certainly is not relevant.

We have not been able to find a single instance where a Chinese court enforced a U.S. non-divorce judgment.

This memorandum does not address the possibility of your suing the Chinese company directly in China and there are times where doing so makes sense.

In conclusion, a U.S. court judgment against ______________ will almost certainly not be recognized or enforced in China. Unless ___________ has assets in the U.S. or in some country other than China that enforces US judgments, a US judgment will probably not be collectable against this company in any way.

I find it hard to believe that this decision regarding the Singapore judgment did not receive a thorough vetting from on high and maybe it does signal a change in enforcement of foreign judgments in China. I for one would love to test it out, but I would want to do it with the perfect case, or something close to it. The perfect case would be a Chinese defendant company that is a real bad hombre (sorry to use a Trump line, but I just cannot help it) who cheated someone in a commercial dispute and then got sued in a U.S. federal court and fought and lost on the merits. Ideally the judgment is for millions of dollars and the Chinese company has the wherewithal to pay it. I know it is asking too much but if the Chinese defendant appealed the lower court’s ruling and lost on appeal also, well that would be the icing on the cake.

Who’s in?

P.S. Many years ago, our firm was representing about 25 companies that were together owed maybe $20 million tied to a Russian vessel that had fled to North Korea to avoid being seized for the debt. I really really wanted to be able to claim title to being the American lawyer (maybe any lawyer) to successfully arrest a ship in North Korea and so I offered to take it on for what I saw as a ridiculously low flat fee but still could not get any (or at least enough) takers. I see some similarities in trying to enforce a U.S. judgment in China. But if anyone does try, please, please, please report your results to us.

China lawyer China attorney

Got an email this morning from a good friend and a very experienced China consultant in China. The email included this article on Why Foreign Companies are Shutting up Shop in China. My quick response was that China retail has always been difficult for foreigners to do directly, but that our China lawyers just keep writing distribution agreements that work. And we are doing it for the widest range of products you can possibly imagine.

Our China distribution contracts typically provide for the following, among other things:

  • An exclusivity provision, or not
  • Whether the distributor can subcontract out distribution, or not
  • The geographic and market territory given to the distributor
  • The term of the distribution agreement and what must be done to renew or terminate it
  • The specific products covered by the distribution agreement
  • The methods the distributor can use to sell the products
  • The pricing the distributor can use for the products
  • Payment terms
  • The distributor’s performance and sale requirements
  • Ordering and shipping procedures
  • Who is in charge of what when it comes to such things as defective products, advertising, warranties, technical support, obtaining permits, marketing materials, etc.
  • Rights regarding new or modified products
  • Whether the distributor can or cannot sell the products of others
  • All sorts of things relating to intellectual property (trade secrets, trademarks, patents, copyrights, etc.)
  • Non-competition during or after the term of the distribution agreement
  • FCPA compliance. Anti-corruption compliance
  • Damages for breaches
  • Dispute resolution (venue, choice of law, etc.)

And as noted in our recent post, China Trademarks and Your Chinese Distributor, our China attorneys also intensively focus on protecting our clients’ intellectual property even before the agreement is signed.

And the above is only part of what sometimes goes into such agreements), but for lawyers who do these agreements all the time, they do become at least somewhat standard.

For more on what it takes to distribute your product in China, check out the following:

 

China lawyersChina has greatly revamped its WFOE formation procedures, making WFOE formations easier in some ways and more difficult in other ways. See China’s New Foreign Investment Law — Less Than Meets the Eye.

Because the WFOE formation procedures are so new, our we have been getting a number of calls from Western companies whose WFOE formations have stalled or simply died out, usually stemming from an inability to work through the new system with the local authorities. One of the things our China attorneys do with our WFOE formations is to set out early and often the steps that must be followed and accomplished for our clients to come out on the other side with a spanking new China WFOE.

I was cc’ed on an email the other day from one of my firm’s China attorneys  to a client for whom we are working on setting up a China WFOE. The email does such a good job setting out what must be accomplished to form a WFOE under the new WFOE formation rules, I thought my reprising it here (taking out any and all identifiers of course and adding in a few links) could prove helpful to anyone out there looking to form a China WFOE.

Here goes:

 

As you know, the PRC government drafted a new foreign investment law last fall and also promulgated a new set of regulations concerning the procedure for registering WFOEs in China. Each local government has been working out their internal procedures for adapting to this new system. Your WFOE in _____________ will be one of the first WFOEs to make use of the new system.

We have been working closely with the ____________ authorities (the Administration of Industry and Commerce of AIC). The local AIC has finally made their basic decisions on the procedure they will follow for the formation of a WFOE under the Foreign Invested Enterprises (FIE) law and associated Ministry of Commerce (MOFCOM) regulations.

The steps in the application will be as follows:

1. WFOE name approval.

2. MOFCOM online registration.

3. Application to form WFOE submitted to local Administration if Industry and Commerce (AIC).

4. Issuance of business license by AIC.

5. Start of business processes: a) open bank accounts, b) cut and register chops, c) open tax and other government accounts, d) set up daily bookkeeping and reporting to the local government, e) execute written employment agreements with employees and open employee tax/social benefit accounts,.

We will be working through each step in order. I will shortly be sending you a series of emails on what we need for step one, the WFOE name approval.

Our team will work with you on Steps 1 to 4 above. With respect to Step 5, we will work with you on drafting your employment agreements for China and your employer rules and regulations. On the other procedures in Step 5, we can take you through all the procedures up to the point where you are ready to formally do business in China.

Step 5 will involve your needing to decide on the following:

  • Local bank.
  • Local bookkeeper.
  • Accountant for tax returns and annual audit and reporting to the parent entity (can be same as B, or different).
  • Employee payment processing and maintenance of employee social benefit accounts.

We must report these names during the formation process, so we will need an answer as soon as is practical. We, of course, are happy to assist you in finding appropriate service support.

As noted, I will send an follow up email explaining the name approval process and the current status.

Please contact me if you have any questions on this matter.

China Manufacturing AgreementsOne of the most common emails we get are those from someone having problems with their China manufacturer. Those problems are all over the map, but one of the more common ones is the Chinese manufacturer starting to make the foreign company’s products and starting to compete with the foreign company in the foreign company’s own market. There is a simple remedy for this and that is to have your manufacturing agreement forbid your China manufacturer from making or selling your product and from using your trade name or your logos. The other thing to do is to register your brand name as a trademark in China and wherever you sell your products. But nearly always when we get an email from someone with this sort of problem with their China manufacturer, they have done few or none of these things.

The below is a very typical email exchange, modified in various ways to hide any identifiers. I am running this because it is a good lesson of how planning is essential when you are having your products made in China. For the basics on protecting your company when manufacturing in China, check out Having Your Product Made In China: The Basics on Protecting It and You.

EMAIL FROM CHINA CONSULTANT TO ONE OF MY FIRM’S CHINA LAWYERS: I hope you are doing well. I’ve got an interesting story for you which could potentially mean some contract work for your China team. This is our largest client who would definitely see the value in paying for an enforceable contract in China. They currently have a contract, but it was badly written. We knew this going in, however it’s sometimes a little tricky telling your client that their contract is not good, or even that their colleagues have no idea what they are doing. I’m sure you can relate.

Our client has a Chinese factory producing product for them. There is a contract in place which details minimum order quantities annually and clauses related to exclusivity in the EU. For the last year or so, our client has failed to meet the minimum order quantities, hence exclusivity would not be certain. The main reason for not meeting the order quantities is problems the factory has had with packing the product in a way that protects it during shipment and also problems with the product itself. These issues have now been sorted out my client is ready to move ahead with up to 60 containers a month. There are also moulds involved that are worth well over a half million RMB.

My client received an email from the factory last week telling them they will be attending the ___________ trade fair, and asked for my client to send a sales person to represent them. So they want to exhibit in Europe and show my client’s product! Though this email was quite amusing as they also asked for information regarding how the product was installed and to send a technical person to give them more details about the whole system, my client is very concerned. I say amusing because the supplier has no idea what testing or standards are required in Europe as they manufacture almost exclusively domestic product. It would be a bit like a factory in China exhibiting in the US and telling Home Depot (their client) that they were going to help them sell their own product.

I am curious on your thoughts and what areas you may be able to help us. I was thinking of the below, but would be open to more.

1. NNN contract. It may be too late for this as I am not sure the supplier will not be keen to sign a new contract at this point. From their point of view, they already have a great contract.

2. Trademark in China. Just reading a bit on your site that my client may want to register their trademarks in China. Are you able to help with this and also do you know the time it would take to do this?

3. Have you heard of a trade show barring a supplier from attending because they are selling essentially stolen products?

Please let me know what you think when you have some time.

 

 

RESPONSE EMAIL FROM ONE OF MY FIRM’S CHINA LAWYERS TO THE CHINA CONSULTANT would need to know more to be able to provide all options but I can say that separate and apart from what has been transpiring between your client and its factory, your client may have already suffered permanent damage by not having already registered its trademark in China. That is the one thing above all else that anyone manufacturing in China MUST do. We can get your client first in line for the various trademarks it will need in a week or two (assuming those trademarks are even still available to your client, which they very well may not be) but it will take 12-15 months for the trademarks to actually issue.

As for the issue regarding the factory, a trademark will not help your client in that the factory could sell the same product under a different name but your client securing a design patent in China and elsewhere might help for this. It will depend.

I cannot recommend doing anything with the factory without getting the whole story because I am scared to death of what could happen here. One part of me says your client should tell the factory to sign a new (good) contract now “or we walk,” but the other part of me says that could be a huge mistake because the factory will almost certainly say, “great, and we keep the moulds because they belong to us and now we will be going into the EU in full force. Oh, and it seems that my cousin has registered all of your brand names and logos here in China, so you will no longer be able to put those on any of your products made in China.” I say this presuming that when you say your client does not have a good contract with its China factory that it does not have a written and sealed agreement in Chinese making clear that it owns the moulds and that it owns its various trade names and logos and the China factory cannot use those without your client’s written permission to do so.

So next step here is for your client to retain us so we can gather up all of the facts and figure out step by step what it can do to protect itself now, if anything.

 

 

China mold contractIn clearing out emails the other day I came across an email conversation from many months ago between a China consultant whose client was having trouble getting its molds from its China factory and one of my firm’s China lawyers. The consultant’s client, an American company, had just assumed that the molds it was seeking belonged to them because they had paid for them (around $120,000).. Below is the conversation between this China consultant and one of my firm’s China attorneys.

China Consultant. It looks like I might need your help with something else as well. Any chance to get molds from a factory if the attached is all my client has? The factory basically said that it gave us a great deal and we have to pay $80,000 more on top of the $120,000 my client already paid if we want to remove the molds from their factory. I am the middle man and my customer wants to move these molds to their factory in the US because they are moving production back home.

China Lawyer: The China factory is going to say that the agreement [emailed to us] was for services and it owns the molds. We have dealt with these sort of issues many times and our goal when retained is to get the molds for an amount less than originally sought and for a savings that more than pays our legal fees. If the Chinese factory really wants the molds, our chances of getting them back for a good price are not good at all. But if the Chinese factory just wants money and if your client is willing to pay for the molds, we ought to be able to get them a considerably better deal.

If your client had a well-crafted China mold ownership agreement or mold ownership provision in any of their agreements with this factory, we’d be able to get them their molds for nothing or for a couple thousand dollars, and within a few weeks. Most likely, their manufacturer would never even have tried to hold on to them. But we cannot tell them that, at least not right now.

China Consultant: At this point, are you amazed by how many ways china factories screw over American companies?

China Attorney: At this point, nothing a China factory can do would amaze me. But yet I never cease to be amazed by how American companies do things in China without first running them by someone who knows what he or she is doing. Maybe it is just because I am a lawyer and so I know how little it would have cost this company to have done things right in the first place (far less than we will charge them now to try to get their molds back), but it is really the American company that troubles me here, not the Chinese one. Virtually any time you do not have a mold agreement with a Chinese factory and you tell them that you will cease manufacturing with them they hold onto the molds, usually just out of spite. This is why we put mold provisions (and penalties) in nearly every manufacturing agreement we write.

China Consultant: My client has decided it will be easier and less nerve-wracking and maybe even cheaper to just remake the molds, especially since they don’t need all of them.

China Attorney: I completely understand. Totally their call. Good luck to you both.