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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.

US-China trade warTo say that my law firm’s international trade law team has been busy lately would be like saying the Great Wall of China is long. They have been crazy busy because the United States has gone wild with trade case against Chinese companies and their U.S. importers — and against other countries and their importers as well.

If you import products from China, listen up.

US Importers of Record are liable for antidumping and countervailing duties tied to the product they import. The Importer of Record is the company listed in Block 26 of the U.S. Customs 7501 form.

Under US Antidumping, Countervailing Duty and Customs laws, the Importer of Record must exercise reasonable care in importing products and in filling out Customs forms. The Importer of Record must correctly state a product’s country of origin and also whether Antidumping and Countervailing duties apply to the imported product. A knowingly false statement on a Customs form constitutes criminal fraud.

If AD or CVD rates go up in a subsequent review investigation, the Importer of Record is retroactively liable for the difference, plus interest. Retroactive liability for AD and CVD cases is a particular problem involving goods imported from China because the United States treats China as a non-market economy country. Since China is a non-market economy country, the U.S. Commerce Department refuses to use actual China prices and costs to determine whether a Chinese company is dumping. All this makes it nearly impossible for U.S. importers to know whether it is bringing in dumped goods. See Don’t Get Crushed When You Import.

In the last week or so, the Trump trade war has escalated big time with new U.S. antidumping and countervailing duty cases being filed against Mechanical Tubing, Tool Chests and a new Section 232 National Security case against all Steel imports. These trade cases move and at warp speed and that means that if your company shows up as the producer or the importer on any of these cases, you have no time to waste. A brief summary of each of these three cases follows.

 1. Cold-drawn mechanical tubing from China, Germany, India, Italy, Korea and Switzerland. On April 19, 2017, ArcelorMittal Tubular Products, Michigan Seamless Tube, LLC, PTC Alliance Corp., Webco Industries, Inc., and Zekelman Industries, Inc. filed Antidumping and Countervailing Duty cases against hundreds of millions of dollars of cold-drawn mechanical tubing from the six countries in 2016.  The petition alleges antidumping duties ranging as follows:

  1. China: 88.2% – 188.88%
  2. India: 25.48%
  3. Italy: 37.23% – 69.13%
  4. Germany: 70.53% – 148.32%
  5. Republic of Korea: 12.14% – 48.61%
  6. Switzerland: 40.53% – 115.21%

The cold-drawn mechanical tubing covered by the complaint is used to produce numerous different products in the United States, including auto parts and machinery.

The United States International Trade Commission (ITC) will conduct its preliminary injury hearing on May 10, 2017 and US importers’ liability for countervailing duties on imports from China and India will start on September 16, 2017, and Antidumping Duties will start on November 15, 2017. Antidumping and countervailing duty orders can last for 5 to 30 years. These sorts of duty orders can and often do mean the end of U.S. imports and sales for many of the named companies, especially those that do not fight the cases against them from the very beginning.

2. Tool chests from China and Vietnam. On April 11, 2017, Waterloo Industries Inc. filed Antidumping and Countervailing Duty cases against hundreds of millions of dollars of imports of certain tool chests and cabinets from China and Vietnam. The ITC will conduct its preliminary injury hearing on May 2, 2017 and US importers’ liability for countervailing duties on imports from China and Vietnam will start on September 8, 2017 and for Antidumping Duties on November 7, 2017.  

3. National Security Section 232 case against steel imports from many countries, including China. On April 20, 2017, President Trump announced a new trade investigation of steel imports under section 232 to determine if tariffs should be imposed because increased steel imports pose a threat to national security. If the United States Department of Commerce determines that steel imports are a threat to national security, President Trump will be empowered to levy high tariffs and quotas on imports of steel products from various countries. Under Section 232, the Commerce Department will investigate the potential national security threat posed foreign steel entering the U.S. market and then issue its findings and recommendations  to the White House. Once Commerce completes its review President Trump will have 90 days to decide whether to accept or reject its recommendations and to impose trade restraints, including tariffs or quotas on steel imports.

If your company has been named in any of these three cases and you want to avoid having to pay massive duties and/or just walk away from the U.S. market for five to thirty years, you need to start organizing your defense NOW.

China LawyersWe created a China Law Blog Group on LinkedIn to provide a spam-free forum for China networking, information and discussion. We are nearing 11,500 members and the number and — most importantly — the quality of our discussions continues to increase as well.

We have had some great discussions, as evidenced by their numbers (discussions occasionally get more than one hundred comments) and their substance. Our discussions range from the practical (“how do I open a China bank account” or ”what do I need to do to comply with China’s new work visa policies for foreigners” or “what are you hearing about China’s crackdown on xyz?”) to the ethereal (“when will China surpass the West in innovation?”)

The group’s diversity is its greatest strength. We have a large contingent of members who live and work in China and many who operate businesses there. Our LinkedIn Group also has many members who do business with China from the United States, Australia, Canada, Europe, Africa, the Middle East and from other countries within Asia. Many of our group members are China lawyers (both inside and outside China and both in-house and with private law firms) but the overwhelming majority are not. We have senior personnel from large and small companies and a whole host of junior personnel as well, again, both within China and outside China. We have professors and we have students of all levels. This mix helps inform, elevate and enlighten the discussions.

Perhaps of most importance is how we block anything and everything that resembles spam. We have become so proficient at this that virtually nobody even tries any more to inject spam into any of our discussions. Many of our members have commented on how much they appreciate our vigorous no-spam policy. I assure you that will never change or even moderate.

If you want to learn more about doing business in China or with China, if you want to discuss China law or business, or if you want to network with others doing China law or business, I urge you to check out our China Law Blog Group on LinkedIn and join up. The more people who do join our China Law Blog LinkedIn group, the better our discussions. Don’t be shy; click here and join us!

And if you are a Facebook person, we can accommodate you there as well and I urge you to check out our rapidly growing China Law Blog Facebook page. Our focus there is on anything and everything that is China relevant. Our goals with our Facebook page are to entertain and to educate and to highlight issues that for various reasons we cannot discuss elsewhere; our Facebook page most certainly does not shy away from controversy. It also most emphatically covers more than just China law and China business. We post on China politics and diplomacy, China culture and history, China travel and tourism, China food and fashion. We post on pretty much anything we find interesting that day. And we give a lot of rope to the comments and that means we sometimes (like just this morning) get complaints about them from our readers. But we are of the view that you are big kids and recognize that it is not our role to protect you from what others might say. We are rapidly approaching 17,000 “likes” of that page (and growing at approximately 1,000 a month) so so we must be doing something right. Anyway, please check out our Facebook page too, by clicking here.

And last and least, after a three year hiatus, I went back on Twitter and I even every so often post on there as well. Click here for that.

China lawyer China attorneyAmerican and occasionally European law students and recent law school graduates are always contacting our China lawyers to ask what they must do to become international lawyers focused on China law. My advice to them is usually a somewhat rambling dissertation on the need to build a solid legal foundation while constantly working on improving your Chinese language skills. I then talk about how almost every lawyer I know just fell into/morphed into their practice area after many years as a lawyer. I always get the sense this is exactly what these law students/young lawyers do not want to hear.

They want specifics and I am giving lectures on following one’s heart, foundations, basics, training, morphing, and luck. They want to become a China attorney tomorrow and I tell them how if they follow an unclear and difficult and convoluted path they might become one some day.

Here then are some specifics, some of which are my own ramblings and some of which were purloined and appropriated from others.

Career Paths 

Many international firms in mainland China seek attorneys with American or British law degrees and high level Chinese language skills, but for various reasons, it is difficult to enter the China legal market without previous experience in the United States or the UK.

It is important to note that Westerners generally cannot become licensed China lawyers; they can only become Foreign Representative Attorneys.  and there is a law requiring Foreign Representative Attorneys have at least two years’ experience in another jurisdiction before they can work in China. Many lawyers get around this by splitting their time between another jurisdiction (including Hong Kong) and China. If you spend 6 months + 1 day in the other jurisdiction and the rest of the year in China, that will count as a year in another jurisdiction. If you do that for two years, you are eligible to work in China as a Foreign Representative Attorney. You still cannot “practice” law in China, but you can work there.

Generally, the best way to do this is to spend your first few years practicing law at a major US London law firm and then go to China to practice for a couple more years. This way you bring an American or British legal education and the requisite high level law firm experience. Even if your Chinese is excellent, your added value to a law firm in China is your American/British legal background. If you go to China immediately after graduation you cut into what you can offer. It is important to note thought that the real key to increasing your value as a foreign lawyer doing China law is to be able to read and write in Chinese. Being able to order a beer or discuss the weather in Chinese is great as a tourist, but nearly meaningless as a new lawyer whose chief job is usually to research and analyze written laws and contracts.

On the other hand, there is something to be said for going to China right after law school. Ten years ago if you went immediately to China you would arguably be ending your legal career before it began. I know a ton of fine lawyers who went to Japan or to Korea or to China and spent decades in those countries and by doing so became virtually unemployable as lawyers in the United States. Globalization is changing this rapidly, but it is still a little risky and I frankly do not know the current situation well enough to advise anyone. I have heard though that if you don’t want to be a partner at a major law firm, going to China first is probably fine. However, if you are looking for an American legal career, It is probably still best to stay in the States for at least a couple of years after graduating law school.

Law Schools

Speaking of law school, one of the more common emails our China lawyers get comes from law students and potential law students, asking us what they should start doing now to prepare themselves for a career practicing China law. My advice on that is also probably a bit too Zen-like for their tastes, but here goes. Get into the best law school you can, not in China. Take as many corporate and intellectual property and private international law courses as you can. Get the best grades as you can. Travel as much as you can. Hone your Chinese language skills as much as you can. Hone whatever other foreign language skills you have as much as you can.

Lately, I have been getting many emails from people who are already working in China in non-lawyer jobs, asking about getting a law degree from an English language law school program tied in with a Chinese law school. My response to them is to ask what that degree will allow them to do once they complete it, because it is my understanding that it will NOT allow you to practice law in either China or the United States. If anyone believes I have this wrong or if anyone is aware of a country that does permit a graduate with one of these degrees to practice law, please let me know via a comment below. See also China “International” Law Schools???!!!!

           Requisite Traits

Practicing law tends to require certain traits. Practicing law in China or even with China also requires certain traits. Far too many people get into law when it is not suited for them and they end up unhappy. You should passionately want to become a lawyer or not bother. You should passionately want to become a China lawyer or not bother.

The book, China CEO: Voices of Experience from 20 International Business Leaders, lists the traits CEOs seek in their expat managers for China and these traits are pretty much the same traits needed to be a good international lawyer or a good China lawyer.  Here is the list, with my comments in italics:

  1. Technical and Corporate Expertise: Select people with a rock-solid professional background and an excellent knowledge of the company.In the legal arena, this means smart people who understand complex legal issues, no matter what the country.  
  2. International Expertise: A posting in China becomes vastly more manageable after an assignment either in an Asian location or another developing market, or both. The key here is that the person who has spent time in another country tends to be better equipped to deal with other countries, including those countries to which he or she has never been. I have seen this time and again with both lawyers and clients. We have many clients who when their business dried up in one country moved nearly effortlessly to another country. We also see domestic companies that simply cannot make the leap to go international at all, even when they should. What you learn in one country (but obviously not everything) will help you in another country.
  3. Multicultural Mindset:When selecting an executive for an overseas posting, look for someone with an adventurous spirit, a sense of humor, and an open mind. This also applies to lawyers.  n an article I wrote a long long time ago on doing business in emerging market countries, I wrote on how doing business in an emerging market means taking nothing for granted:

I have a mantra for my own legal work in these countries that translates well to the business world: ‘Assume nothing, but assume that you are assuming things without even realizing you are doing so.’”

Things will be different. Very different. Things you take for granted in your home country might not exist in the emerging market country. Things you take for granted in your home country might be the exact opposite in the emerging market country. Things you think will be totally different in the emerging market country may be exactly the same. Things you thought you knew about emerging market countries based on what you know from another emerging market country may be completely different in a neighboring country, or even in another region within the same country.

The principle, one more time: Keep an open mind, and assume nothing.

  1. Commitment to Learn: Learn from those around you. Listen to your employees, JV partners, clients, and customers. This is equally true for international lawyers. 
  2. Humility: Be humble and avoid using an authoritarian style. Influencing and coaching is the way to get the best out of your Chinese employees. Of course. This is also the way to get the best out of the lawyers in other countries with whom you will be working.
  3. Strength: Be unyielding in defending core corporate values and culture. In the legal context, this means doing things by the law, even if you see others around you not doing so. This also means always telling your clients the truth.
  4. Patience: Be patient; use a step-by-step approach in China, not a Big Bang approach. I will borrow again from my emerging markets article:

Exercise Extreme Patience.  This principle stems from the maxim that everything takes twice as long as you think it will. If it takes twice as long in the West, triple that in emerging market countries. You’ll go in both as a businessperson and a teacher — and in both roles, the learning curve of your partner will almost certainly take way more time to deal with than you think.

For example, many emerging market countries have a history where “bad business” meant “thinking long-term.” A year or two after the fall of Soviet communism, I was involved in a matter where an investor put $250,000 into a Russian joint venture. The business very quickly was making good money and all indicators pointed towards steadily increasing profitability. But, quite quickly, the Russian company stole the $250,000. Was it so irrational for him to think so short term in a country where the government and tax systems had such a history of unpredictability?

  1. Guanxi-BuildingBuild your guanxi not only internally (with subordinates, peers and superiors) but also externally with clients, suppliers and government officials). A strong guanxi network is a fundamental element of your success in China. As a lawyer, both you and your practice will benefit by your doing more than just staying in your office poring over law books. Get to know your clients, your fellow lawyers, good people in the industries in which you are working, and treat them with respect. This is basic good business for anyone. An international lawyer friend of mine (with a great international law blog) recently sent me a very popular and highly regarded book, The Go-Giver, Expanded Edition: A Little Story About a Powerful Business Idea, that expands on this in all (not just China) contexts. I highly recommend this book to anyone contemplating a career in law or in business. Lawyers who succeed widely generally work well with others. 
  2. Speed: Be flexible and quick. Stay well informed; the business environment in China is in a constant and rapid flux, probably much more so than in other markets. This is true of international law as well, and if one is going to practice in this area, one must enjoy and thrive on constant change and even constant uncertainty. You need to be prepared to work tirelessly just to keep up.

 

Are you Sure?

A few years ago, a law student emailed me a link to a Quora question and answer session on what it takes for someone to succeed in working for a company in China as a foreigner. The law student specifically referred to answers given by David Wolf and asked whether those things apply to China lawyers as well. They most certainly do.

The specific question on Quora was “What are the key skills needed to succeed working for a company in China as a foreigner?” David Wolf’s excellent answer shows as number one because the highest number (including a number of prominent China bloggers) voted it number one. Wolf’s answer was that “as someone who has hired on behalf of large and small companies here in China, I can tell you the kind of young foreigner who gets hired has most or all of the following: (my comments are in italics)

  1. Chinese language skills: Language is the key to culture, and if you don’t understand the culture here, you aren’t going to add much value, and you’ll be gone within 2-3 years. Sure, a lot of people speak English, and it is easy to operate in an English bubble in larger companies. But the better your Chinese and the better your appreciation for the culture, the better you’ll fit in. For lawyers, being able to read and write a language are more important than being able to speak it and law students need to realize this. Being able to order a beer in Chinese is great, but being able to read and analyze Section 308 of such and such code and being able to read a ten-page contract in Chinese in the same amount of time it would take you to read it in English is what law firms need.
  2. Communications skills: industry specific knowledge and skills can be learned. You need to come in with the clear ability to express yourself in both written and spoken form. Absolutely. Want to piss off a client?  Send them a long email giving them six options without making any recommendation. Want to make a client happy?  Send them an email clearly explaining and ranking their best three options.
  3. An ability to roll with the punches: operating in a cross-cultural environment is trying at the best of times, and at the worst of times would test the patience of a saint. If you are high-strung or expect things to work the way they’re supposed to all the time, don’t even get on the plane to come here. This is particularly true at smaller law firms and companies and this is a crucial element in my law firm’s hiring at all levels. One of our lawyers began with us as a legal assistant and we hired her for that position because she had great marks as a cocktail waitress at a Vegas casino. We figured if she could keep her cool while dealing with a bunch of drunk losers, she could keep her cool in a fast-paced office. We once hired a receptionist who had been the interface between a private school and the students’ parents because we figured if she could deal with parents who are wildly concerned with their kids, she could deal with clients who are wildly concerned about their legal matter. I love asking potential hires about their travels and I do so because I want to know if they like going to the same ski resort every year or prefer going to remote villages in Guatemala (which was true of another of our legal assistants). The person who treks to Guatemala in his or her spare time has learned to roll with the punches.
  4. A very clear idea of what you offer that is hard to find or is unobtainable from among your Chinese peers, and the ability to express that well. If you can’t tell me in 50 words or less what you have that I need but I can’t get from a fresh Tsinghua University graduate, you are wasting your time and mine. If a potential hire cannot pitch me on his or her skill-set, it is unlikely they will be able to instill confidence in our clients.
  5. Passion for the business that is so real that others can feel it walking into the room. If you interview with me and I think you have not spent hours poring over our website or that you are talking to me just because you want a job (as opposed to this job), you have no chance. I stretch this even further by wanting to see passion in other things as well. I want someone who shows passion for something and I do not care what it is. Passion translates. The last kind of person I want to hire (for a million reasons) is the person who just doesn’t seem to care about anything.
  6. Integrity: Like few other places on the planet, China will test your character and your ethics. If you do not know when or how to stick to your principles when the chips are down, you’re part of the problem. This is in many respects everything. The lawyer-client relationship is based on trust and it cannot work without it. 
  7. Excellent project management skills: This is something in fairly short supply among people coming out of school in China, and it is expected from expats. This is very important, but in law there is generally a high correlation between high grades and the ability to develop these skills.
  8. Creativity: I don’t mean Pixar-style creativity, but the ability to come up with new ideas, to not only think outside of the box but burn the box altogether. Far more important for the law than most law students realize, and more important in an international context than a domestic one.
  9. Last and by no means least, a demonstrated commitment to China: Most hiring decisions for China and Asia positions — even for multinational companies — are made on the ground here in the region. If anything, this is more the case now than it was a decade ago, as most firms have so expanded their operations in the region that the Asia HR function is managed separately. See number 5 above.

Go forth and prosper.

China law and business eventOn Tuesday, April 18, I will be speaking on China IP at the Global Sources Summit in Hong Kong. This summit is designed to teach entrepreneurs and small businesses how to create and build an Amazon FBA (Fulfillment by Amazon) business. In 12 Business Conferences In China You Should Attend, Bay McLaughlin McLaughlin in Forbes Magazine describes it as follows:

This popular summit shows entrepreneurs and small businesses how to create and build an Amazon FBA (Fulfillment by Amazon) business. You’ll learn actionable strategies to grow your Amazon seller business and get insider tips on successful China importing. With over 3,000 booths this conference in huge! It will be held April 17-19, 2017, in Hong Kong.

I will be speaking Tuesday, April 18 on “How to Protect Your IP From China, Especially From Your Own Manufacturer,” focusing on the following:

  • How to choose the right China manufacturer
  • How to identify the IP assets you need to protect
  • How to structure your China manufacturing deal
  • How to draft your China manufacturing contracts to protect your IP
  • What you should know about trademarks, patents, copyrights, and licensing agreements
  • What to do when you’ve been copied

You can register for the Global Sources event here.

I will then cross the bay to speak in the middle of the afternoon on April 21 at Global From Asia’s Cross Border Summit, whose theme is “Grow Your Business in Asia.” This event too made Forbes Magazine’s top 12 for China list and Forbes justifies this choice as follows:

Held in Shenzhen, China, on 21-22 April, 2017, this event encourages international participation among industry leaders in cross border commerce between China and the rest of the world with content related to marketing, management, manufacturing, and technology. There are numerous roundtable discussions and networking sessions to encourage collaboration and idea generation. This event is hosted by Global From Asia, which also has a fantastic podcast about doing business in China.

My talk will be on “Global IP, In and Out of China: Protecting your brand via trademarks, inside China and globally.” You can register for the Cross Border Summit here.

Both events have a plethora of great speakers and I hope to see you at one or both of them.

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By now just about everyone knows about the Chinese-American doctor who was forcibly removed from a United Airlines airplane. To say this has been a PR mess for United Airlines would be an understatement. It has been a worldwide disaster. America is angry. China is outraged. The video has gone viral. Full disclosure: I started my legal career in Chicago at the law firm that back then (and I think still does) represent United Airlines and I have been a Platinum 1K (the highest tier) at United Airlines since as long as I can remember and I generally like the airline and I generally defend it.

What does this have to do with your China business? Everything.

Let me explain.

If you run any sort of business, you need to be prepared for major problems and you need to have a plan in place for dealing with those problems. Your plan must include how to prevent the problem from occurring, how to mitigate the problem if it does occur, and, sometimes most importantly, how to apologize for the problem when it does occur. If you do not have such a plan in place, your China business is at risk, and let me tell you, China poses major risks. Why is that? Because China has ~1.5 billion people and a large chunk of those people are on the internet and what happens in China or with China does not just stay in China, and vice-versa.

Let’s analyze what United did wrong and how you can do better. First off, United should have prevented the problem in the first place, and I am not talking about better algorithms that might have prevented the overbooking situation, though that certainly would not hurt. No, I am talking about how (based on what I have read) United was willing to offer only $800 to get passengers off the plane once it had become clear there was an overbooking situation. Why didn’t United just keep raising its bumping reward until it got voluntary takers? You can’t tell me that it would not have gotten more passengers off that plane had it kept raising its offer. I have to believe that it had it been willing to spend another $700 per passenger it would have had sufficient takers. United needed to get four passengers off that plane. Do you think paying another $2800 total will have killed them? What do you think this debacle is going to cost United in cancelled or never-booked flights? I’m just wildly guessing, but I’d say more like $2.8 million than $2800. Not to mention the inevitable lawsuits which will cost them another ~$2.8 million in attorneys’ fees and payouts and additional bad and lingering publicity. Does United not give enough authority/discretion to its employees to solve problems like these?

And now let’s talk about the “apology,” which I intentionally put in quotes because it really was more of an airline-speak statement.
China contingency planAccording to Psychology Today (which is what I always use when I am playing psychologist), you only get one chance to make an apology without sounding excessive. Therefore, you need to nail it with your one chance. And United Airlines most certainly did not. Let’s break down this apology.

  • It starts out saying this is an upsetting event to all of us here at United. Really? This is nearly the equivalent of saying, you having to witness your mother dying really makes me feel bad. Why is United focusing on how this has impacted United rather than on how it impacted its own passengers? Not smart.
  • I apologize for having to re-accommodate these customers. Really? I did not have sexual relations with that woman. When you apologize, you should personalize it and humanize it. This “apology” fails on all accounts. It does not constitute an apology for the way a passenger was dragged off a plane nor does not apologize for United having overbooked the flight. It is in the passive voice; rather than say I apologize for our having…., it makes it seem as though United had no choice but to do what it did. But United did have a choice as it could have paid more money to get passengers off. This is a classic non-apology. And what the heck does re-accommodate mean anyway? Is this airline-speak, because it sure as hell isn’t the way the normal people I know speak. Using industry buzzwords is a classic way to create distance and yet this is a time when United should be doing everything it can to reconnect with its customers.
  • “Our team is moving with a sense of urgency to work with the authorities and conduct our own detailed review of what happened. Your mother froze in the cargo hold, but don’t worry, we will move with a sense of urgency to work with others to review what happened. What the heck does this even mean? 1. Why say “sense of urgency” instead of just “urgency.” Another example of trying to create distance. Why talk about working with others? Why say “to review what happened” instead of to determine and report back on what happened. Most importantly, you are the CEO of United Airlines, have you not watched the video? Isn’t there enough there to say that the situation was handled poorly? Should he not at least have referred to what happened?

Now as a lawyer I know that an apology constitutes an admission that can be used against you in a court of law, but surely Munoz could have said something more clearly and more compelling than this. Munoz just really never takes responsibility for the problem. He never takes ownership of it. And don’t think apologies don’t matter. Many years ago, I spoke at a terrific lawyer conference on the cutting edge of law. I remember one of the speakers (I apologize because I do not remember his name) gave a great talk on crisis management and he used MLB pitchers Roger Clemens and Andy Petitte as the examples. Both Clemens and Petitte had been accused of using performance enhancing steroids. Clemens vigorously denied having done so and essentially accused those who said otherwise of being liars. Petitte pretty much immediately owned up to his mistake: I used them, I should not have, I am sorry, it will not happen again. How many baseball fans know Clemens used steroids and dislike him for having done so? Way more than with Petitte. I can hear this crisis management speaker saying “Munoz should have emulated Petitte here.”

Our China lawyers often have to deal with PR imbroglios. The below are some of the following:

1. A client makes a product that many consumers would not want others to know they use and it has its Chinese manufacturer ship this product direct to the consumer who orders it and when the order goes out an email from the Chinese manufacturer goes out saying that the product has been shipped. This email appears to come from our client and usually — of course — this email goes out only to the one person who ordered the one product. But one day it inadvertently went out to every single person who had ever ordered the product and it went out to all of these people in the “to” line so that everyone else could see everyone else’s email address. We and our client immediately went into overdrive and sent out an email apologizing for the problem, owning up to it, assuring that it would never happen again, and offering a substantial discount on any future orders within the next year. This apology email went to one person at a time and it went out within 15 hours of the incident. Our client got hundreds of responses back to its own email and almost all of those responses were appreciative of how quickly and decisively it had acted. They got a few emails from people saying that they would never buy from our client again, but that was it.

2. Many years ago, a company that made ultra-high end outdoor equipment at prices about double of any of its competitors came to us because its Chinese manufacturer had sold product that our client had rejected as defective — let this be a lesson as to why your China manufacturing contract should clearly provide exactly what happens to rejected product. Anyway, the defective product had found its way to the United States and many many buyers of it had come to our client to ask for a replacement per our client’s 100% replacement guarantee. Our client said that the defective products were not theirs and they were right as the defective products were actually counterfeits. Our client wanted us to research its legal obligations to replace the defective product. My response to them was as follows: Look, we can charge you a lot of money to legally support your decision not to replace the defective equipment, but might you not be better off paying to replace it and maintaining your great reputation than paying us to fight against replacement and perhaps irreparably harming your reputation. The client said “umm” and that they would get back to me on how to proceed. They chose to replace and I have always thought that was a wise decision.

I could go on and on with real life examples but it would be a lot more productive for you to create your own worse case scenarios for your own business. 

Back in the golden age of China blogging, Will Moss (now the Director of Reputation Management at Intel) had a terrific blog called ImageThief, that focused (at least sometimes) on China public relations. He did a post once on how foreign companies need to prepare beforehand for their China PR disasters and I saved the key lines from that post and I repeat them to you below now:

Be prepared to respond fast. Silence often equals guilt in the eyes of the public. Have an issues management kit that anticipates possible crisis scenarios in place beforehand. Don’t rely on guidance from overseas headquarters.

Pay close attention to the tone of public communications. Address concerns. State positions. Don’t condescend or talk down to Chinese audiences.

Get everybody on the same page. Limit public comments to the minimum number of spokespeople and throttle unauthorized communication.

Brief employees so they know what is expected of them and how to respond to media queries, ambushes, etc.

For consumer brands, ongoing monitoring of the Internet is a good idea. Internet scandals are often flashes-in-the-pan, but they can erupt into the mainstream. It’s better not to be caught by surprise.

Great advice isn’t it? And it applies worldwide.

What are your thoughts?

China lawyersNo idea why but we have lately been seeing an increase in clients interested in getting their products from China anonymously. These companies want to have their products made in China without anybody knowing who in China is making them, and sometimes that that they are being made in China at all. There are many reasons why companies seek an ultra-low profile when having their products made in China, including the following:

1. They do not want their buyers to know that the products they are buying are made in China. But what about place of origin requirements? What about them? If you are selling an item that says “hand burnished in the United States” most of your buyers will believe your product is made in the United States even if all you do to hand burnish them is to have some $8.90 an hour employee (perhaps even from China) spend five seconds running a clothe over your product before it goes on retailer shelfs. There are plenty of items that people buy all the time without realizing they come from another country. For example, about 90 percent of seafood sold in the United States is imported, yet in my experience pretty much nobody realizes it is even more than half. Whenever someone tells me that they refuse to eat anything made in China I tell them that if they eat garlic or anything with garlic, they do eat something from China. About 80 percent of garlic in the US comes from China and that number is almost certainly considerably higher when it comes to processed and frozen foods. The point is that many (most?) companies that are completely truthful about where their product would prefer their buyers not know their products come from China.

2. They do not want their competitors to know that their products are made in China and they especially do not want their competitors to know exactly where in China their products are made. This is incredibly common. If you are making better widgets than any of your competitors and selling them at a better price, you can bet your competitors want to know how you are pulling this off. And if you are accomplishing this by using a super high quality super efficient Chinese manufacturer, you can also be that your competitor(s) would seriously consider using your same Chinese manufacturer if they could find out who it actually is. I cannot tell you how many times one of our China lawyers has asked a client how it chose XYZ Chinese manufacturer and gotten the following sort of response: “Well, company X is the leader in our industry and so I tracked down who company X uses in China to make their widgets and I went to them to have them make our widgets too.”

3. They do not want their Chinese manufacturers to know where their products are made in China. I’m being somewhat facetious here, but not really. In fact, it is this reason that has been driving the increase in clients seeking China manufacturing anonymity. They want to have portions of their product(s) made by three to six different Chinese manufacturers, without any of the manufacturers knowing about the others and without any of the manufacturers knowing to what use its portion will be put.

But all of the above is easier said then done, and I would estimate that most SMEs do not achieve the secrecy they seek, either because they mess up somewhere along the way or because doing so is simply too expensive.

The below are the pressure points where we see companies frequently fall off the secrecy track:

  1. The initial email to a potential Chinese manufacturer. Yes, the initial email. If your name is Luis Twederluski (I made that name up so please don’t even bother to look it up) and you send out emails to ten companies in China from your LuisTwederluski333@gmail.com account, you have probably already revealed more than you wanted. From just your email address, there is a good chance someone can figure out your full name (this is oftentimes possible even if your email address is goshijustreallyloveparis@gmail.com). And then from your full name there is a good chance they can figure out your company name and from that what you are intending to have made in China.
  2. The parts in your product. Take the company that does not want anyone (especially its China constituent part suppliers) to know what it is making. This company has company A in Suzhou make part 1, Company B in Xi’an make part 2, Company C in Dongguan make part 3, and company D in Shenzhen make part 4, and then it calls it a day. Wrong. What if one of these companies somewhere stamp their name on the parts that are going into the product? What if even without any stamping of names their parts are identifiable by those in the industry? The more typical problem with having 3-6 companies operating completely independently of each other is cost. If you are a large company with personnel who can coordinate logistics, timing and interoperability of parts between your various suppliers, then you should be covered. But if you are a small company and you think you can coordinate all of this things will sitting home in Pittsburgh, well that just isn’t terribly likely. Most importantly, where are you going to put the 3-6 parts together into your product and then have it packaged? If you were thinking of doing these things in the United States for anything near to as low a price as you would pay in China, well that is not likely going to happen.
  3. Importing the product into the United States. It never ceases to amaze me how few people realize how easy it is to review import records on the web. Just by way of an example, Google search “Lululemon (which is NOT a client of our firm) import records” and the first item will take you to www.importgenius.com which for free shows you a “sample shipment record” showing Lululemon imported “hustle pants” from Mactan Apparel out of Taiwan, but the pants actually came from Cebu, Philippines. If I actually cared from where Lululemon gets its products, my next step would be to sign up and pay for Import Genius (there are other search services as well) and then start going through all of Lululemon’s import records. Your competitors might be doing that with your import records even as I write this. We have had client companies tell us of the amazing lengths they have gone through to keep their name off U.S. import records. A few years ago it was the rage to form a company in Hong Kong and have that HK company buy your products from the PRC manufacturer and then have the PRC manufacturer actually ship your products to your Hong Kong entity and then that way the US import records would not reveal the name of the PRC manufacturer because your own HK company would be the exporter. There was (and still is) usually a far easier way, especially if you are in a large industry. Let’s say your company is called World’s Best and Finest Toys and you sell toy dolls that you have made in China and you do not want your competitors (or anyone else for that matter) to know from which toy factories you are getting your dolls. You can set up an import management company and call it World’s Most Mediocre Hamburgers and Kielbasa’s and use that company to import your dolls. This is a cheap way to make it far harder (perhaps impossible) for anyone to know what you import.

A word of warning is definitely in order though: some of these methods may not work or may even be legal for your particular industry or your particular country or may increase your taxes or just otherwise make your life miserable. In other words, don’t anyone write me an email months from now saying (and I do get these) I did what you told me to do in this [link] blog post and now I am wondering if….” The above are examples; I am not telling you to do anything at all. In fact, I am telling you that you will be making a huge mistake to do any of these things without first consulting with an international trade law attorney and with your tax professional.

The goal of this post is not to solve your product secrecy problems but rather just to get you thinking about the issues and not to blow your cover with your first email.

What do you do to maintain your product secrecy?

China manufacturing lawyers
China product manufacturing: the tensions are rising

We often write about the increasing sophistication of China contract manufacturing. Fifteen years ago, the typical US-China manufacturing agreement involved the sale of socks or rubber duckies. Today, the typical contract involves a complicated electronics device involving hardware and software and all sorts of intellectual property and much greater risk of defect and injury than a pair of socks.

With the increasing sophistication of China manufacturing and China manufacturing contracts has (not surprisingly) come increasing business and legal sophistication by Chinese manufacturing companies. Two to three years ago the overwhelming majority of manufacturing contracts my firm’s China manufacturing lawyers wrote were accepted either unchanged or with only minor changes by the Chinese side. Today, Chinese manufacturing companies better understand the legal impact of the contracts they sign and they are becoming increasingly reluctant to sign contracts that pin major potential liabilities on them.

Today’s post is about liability issues for defects, which issue our China manufacturing lawyers are dealing pretty much every day and which issue is truly on the front lines in terms of the contract “war” that has broken out between China manufacturers and their foreign company buyers. The below is an amalgamation of three recent emails we sent to companies looking to our China lawyers to reduce their product defect risks when buying from China.

 

I understand your concerns. Defect rates from China are too high.

For China, the issues surrounding product defects are usually the following

1. You need a Chinese language, Chinese law agreement you can enforce in China.

2. Contracts typically used in the West are usually too vague and flexible for China. For China, you need to be blunt and clear. Defect beyond some rate means a monetary penalty of some amount. If your contract is not clear on what constitutes a defect and the price your manufacturer must pay for the defects, it is not appropriate for China. Do you want just a repair/replace warranty, or do you want damages also to include the costs of dealing with the issue or do you want it to include all the above, plus claims from customers and consumers. If ALL the damage is included, the number can be big and if the Chinese side understands this (and they probably will), there is a good chance they will not agree to it, unless you have sufficient economic leverage over them such that they feel they have no choice. Even if they do agree to it, you need to be concerned about whether they have the money or the insurance to pay on any major problems.

3. One of the biggest issues for China is how to enforce your defect contract provisions. We typically propose something like the following:

Step One: Determine a sum certain amount owed based on a mechanical formula. Calculation is entirely in our client’s control with no good faith participation by the Chinese side.

Step Two: Report the amount owing to the Chinese supplier through a formal invoice. Do this on a regular basis, say every quarter.

Step Three: Collect the amount owing. The most common way to do this is to apply the amount owing as a credit against the invoice for the defective product, against current invoice amounts, and against future invoices.

Step Four: If step three does not cover the amount, send an invoice for the remaining amount. If the invoice is not paid, file suit in China. If the lawsuit is based on a sum certain amount even the threat of the lawsuit can have some benefit.

You can see how the above can work well for what you are seeking to accomplish, but Chinese factories and Western buyers are in major battles now over defect issues. The Chinese manufacturers are concerned with agreeing to sell on a net 30 or net 60 or net 90 basis and then having the foreign side refuse to pay because of claimed defects. The Chinese is legitimately concerned with the foreign side using the defect issue to reduce payments actually owed. All of this is right now a hot topic within the Chinese export factory community so the odds are good that your China factories will be sensitive on these issues.

We should discuss the above and then formulate a strategy for dealing with your China manufacturers.

 

International lawyersLong ago, I once said on here that if we get at least three emails on a particular topic, we will write about it. I long ago received three emails on the Wall Street Journal article Did Xie Zhikun’s Nearly $1 Billion Go Missing? A Private-Equity Mystery but I am just now getting around to writing about it.  To grossly oversimplify this terrific article, Xie Zhikun claims to have invested $1 billion into a U.S. based private equity company via a “share entrustment agreement” that specifies that he is the actual owner in a third Cayman Island Company. The Wall Street Journal says these sort of “agreements are commonly used by wealthy people who want to put money into shell companies without being identified in corporate records.” To grossly oversimplify the private equity company’s response: Xie Zhikun who?

And to grossly oversimplify the three emails I received regarding this article: WTF?

Let me just say that what is described in the article is shockingly common and my firm’s international lawyers often see the same sort of thing, including the following:

  • A Russian company contacted my firm’s litigation team to pursue an $3 million dollar lawsuit against an American company that had failed to pay for a Russian airplane it had purchased. But when our lawyers saw the paperwork, it all reflected a $350,000 purchase price. When we asked the Russian company why they had told us the purchase was for $3 million when the paperwork said $350,000, they immediately told us that the paperwork had been drawn up that way to save them taxes in Russia. We declined the case.
  • Our law firm once defended a case on behalf of a large shipping company involving an alleged $2 million or so in damaged cargo. But because the cargo manifest put the value of the cargo at something like $500,000 (presumably to avoid having to pay more for customs and or for insurance), settlement was based on the $500,000 figure, not the $2 million the cargo was allegedly (and realistically) worth.
  • A Chinese company (let’s call it Chinese Company A) contacted us because it had never received the shares it had been promised for investing $8 million into an American company. Our review of the documents did say a Chinese company was entitled to shares in the American company, but it was a completely different Chinese company from Chinese Company A. Let’s call this second company, Chinese Company B. Our China lawyers asked Chinese Company A whether Chinese Company B had received the ownership in the American company promised to Chinese Company B and who exactly is Chinese Company B. Chinese Company A said it did not know whether or not Chinese Company B had received those shares and that was because Chinese Company A and Chinese Company B “no longer had a good relationship.” We declined the case, without even bothering to ask why Chinese Company A had invested $8 million into an American company in return for that American company giving stock to another Chinese Company.
  • A Chinese company many years ago did what used to commonly be referred to as a “round-tripper.” Round-trippers were when a Chinese company would have someone in the United States form a US company and then that US company would go to China (hence the name round-tripper) as a foreign company able to take advantage of all the tax and other benefits China used to provide to foreign companies. Anyway, this Chinese company contacted one of our China lawyers based in China because it had become massive and it was looking at going public. Only one problem: it was 100% owned by a United States Limited Liability Company that had not paid any U.S. taxes for more than a decade. And here’s the real kicker: the U.S. LLC was 100% owned by the cousin of the founder in China and the founder had no clue where the cousin was in the United States, nor how to find him.

What’s the common thread in all of the above? They all involve a transaction that ran into problems because at least one key set of documents did not clearly reflect the deal, either because they were wrong on the amount of money involved or they were wrong on the parties involved. Many of these deals also involved Chinese (or Russian) companies that refused either to retain lawyers to represent them on the deal or retained legal counsel  inexperienced with foreign deals. At least this was the case on all of the matters on which my firm’s international lawyers were approached to handle.

Now here’s the funniest thing about all of this (to the extent there is anything at all funny about all of this): when I discussed this WSJ article with one of the China attorneys in my firm, we spent all of maybe 15 seconds on it and our conversation was basically to note that “we’ve obviously been doing this China law thing too long because nothing in that article surprised me in the slightest.”

I feel compelled to conclude this post with a few words of wisdom, so here goes:

  1. What you put on paper will last a lot longer and be a lot more powerful than any side oral agreement you might have. Therefore think long and hard before you sign anything on paper that even resembles a contract.
  2. Whatever explanation the other side gives for needing the documents to reflect one thing even though the deal is supposedly based on another thing will almost certainly not matter or will be denied when the proverbial ______ hits the fan.
  3. No smart businessperson does international deals without first retaining a good lawyer.

The above prove the points.

Your thoughts?

Negotiating with Chinese CompaniesJust read a post over at Andrew Hupert’s ChinaSolved Bog, entitled, 5 Negotiating Lessons from Sec. of State Tillerson’s Beijing Trip. Hupert, who I count among the foremost experts at negotiating with Chinese companies, uses Tillerson’s recent Beijing trip as the springboard for explaining five tips on how foreign companies should negotiate with Chinese companies.

Before I get to the five tips however, I want to highlight what I see as one of the best, one of the most realistic, and — most importantly — one of the most accurate descriptions on what it is like to negotiate with a Chinese company:

We’ve seen it before. The Chinese side raises their glasses of Mao-tai and proposes a long relationship of mutual understanding and joint cooperation. The western side “gambei’s” and then makes their own polite toast about “long term cooperation, success, and prosperity”.

Now, at this point the westerners feel they are done with the preliminary small talk, and are ready to begin the opening phase of the REAL negotiation.

The Chinese side feels they are running the new partnership, co-own the intellectual property, and will make all substantive decisions about operations, hiring, and distribution.

If you for any reason do not believe the above accurately reflects how the typical Chinese company views its dealings with foreign companies you should memorize the above and then in one year of dealing with China ask yourself again whether it is accurate or not, because it just is.

Now on to a some of the Hupert five.

That treacherous opening Chinese toast. Hupert notes how Tillerson, “like many western execs before him, . . . doesn’t seem to understand what the Chinese believe he’s agreed to. This is true. Our China lawyers almost never document a China deal without there being at least one issue on which our Western client believes the China side has agreed to something to which it has not. There are many explanations for why this always seems to be the case, ranging from cultural and language differences to the China-side penchant for agreeing to something to get something in return for that agreement and then retrenching from the previously agreed upon item after it has already succeeded in getting concessions from the Western side.

Manage the agenda, and then focus on individual deal points. Western negotiating protocol is to focus on the key negotiating goals, but Chinese negotiators “always” have a larger agenda. Or as Hupert puts it, “too many western executives fighting internal deadlines and hoping to satisfy their HQ sacrifice big-picture strategy for short-term deliverables.”

Watch the timing mismatch. “Don’t make real concessions now for longer-term promises.”  Western companies too often believe that if they make xyz concession to their Chinese counterparty now, their Chinese counterparty will make the next concession the next time around. Wrong. Where we see this a lot is with Western service companies cutting their rates to Chinese customers to “get into China now”  and “build loyalty, all with the plan to raise their prices later. Problem is that the Chinese company for whom you just cut your prices will view your loss leader pricing as their ceiling, not as a floor and it will move on to another naive Western company for its next contract. Or as Hupert puts it

You’re in the same boat – but who is the captain and who is the crew? Hupert concludes his post by highlighting how different perspectives so often can lead to problems down the road. Hupert uses the example of how it is “relatively easy to get a Chinese negotiator to agree in principle to a cooperative partnership,” but how that “cooperative partnership is viewed by the two sides will be very different. “Both sides tend to walk away thinking that they will have the power and authority to protect their interests and further their positions. In practice, however, Chinese tend to feel that they will call the shots on issues pertaining to China.”

For more on how to negotiate with Chinese companies, check out the following:

China Design PatentsLast year, in the midst of media hullabloo regarding Apple having lost a design patent lawsuit in China, we wrote China’s Design Patent Scourge Has Snared Apple: Nobody Panic, calling for everyone to calm down because Apple would likely prevail in the end. Well Apple just did. Prevail that is. First though a large dollop of background, taken straight from last year’s post.

Big media today has been covering Apple’s BREA design patent dispute with “a small Chinese competitor” and I woke up this morning with my inbox filled with emails from financial analysts and reporters clamoring to talk with me about this news. I assume the other China lawyers at my firm are being similarly inundated. This is obviously huge news and for more on this story, check out the following:

But first, everyone calm down and let me explain.

I went on to make clear that I did not know anything but Apple’s specific case, but felt like I did, because our own China lawyers we had seen so many facially similar design patent matters.

I do not know anything at all specific about Apple’s case. Not a thing. My law firm does not represent Apple on its IP matters, nor do we represent the Chinese company with this patent claim. Additionally, I have not looked at a single pleading in this case, nor have I discussed this case with any of the China IP attorneys in my firm who may (or probably not) know more about this case than I. This post is based on what we have seen (especially lately) happening with China design patents, which is a whole lot.

In the last six months or so, we have gone from dealing with maybe one China design patent matter a year to at least one a month. We cannot pin down this massive acceleration in design patent matters on any one thing and so we simply think that word has gotten out among Chinese companies regarding the effectiveness of engaging foreign companies in design patent disputes.

I then explained China’s design patent laws:

China law defines a design as a shape, pattern, or combination thereof or the combination of a color with a shape and pattern, with an aesthetic appeal and for industrial application. If you think this definition is incredibly vague and potentially broad enough to drive a truck through, you would be right. On top of this, China’s patent office does not “review” design patents before granting them. Or, as I love to tell our clients over the telephone, “I could probably secure a China design patent on the blue socks I am wearing right now.” When I say that, I am being intentionally dramatic, but I honestly believe my chances of securing such a design patent are not that bad.

The other things you should know about Chinese design patents are that the patent grants its holder exclusive use of the aesthetic features of a product not its functioning portion. In other words, the patent is on how the product looks; its external appearance. Not kidding, but it is quite possible that the small Chinese company with the mobile phone design patent could use its design patent against any cell phone company with a product that looks like an iPhone.

I then discussed the design patent cases our China attorneys were handling:

These cases typically start with a phone call from a Western company telling us that some company (usually a company it already knows and usually either its manufacturer or a competitor) just contacted the Western company (or the Chinese company that makes the Western company’s product) and said that the Western company’s product is violating the Chinese company’s China design patent. The Chinese company then threatens to sue the Western company for patent infringement damages and to block any of the Western company’s “infringing” product from leaving China. Needless to say, the companies that call us on these matters are more than a little bit concerned.

Though I am not going to claim that these are pleasant situations or inexpensive for our clients, but I will claim that they are not as bad as they initially appear. I have heard that China issues around ten times more design patents than the United States patent office, which reinforces my contention that I could get a China design patent for my blue socks. There is no substantive examination of a design patent application in China. Instead, all you really need to do to get a China design patent is to complete your design patent application properly. So if I complete the design patent application on my blue socks, and attach a proper and appropriate drawing of them, along with a proper power of attorney and I make the right claims regarding my having designed my blue socks and regarding their being of a new design, I almost certainly will get my design patent.

I then explained why design patents are so weak as are most design patent cases filed by Chinese company plaintiffs:

BUT, my blue sock design patent will be as weak as a kitten. And it is for this reason why China design patent actions are not as scary as they first appear and why I am calling for nobody to panic on Apple’s behalf either.

In the cases we handle nobody has yet actually had customs block their product from leaving China. The reason is because China customs generally requires a party seeking such a block to post a substantial bond. That substantial bond then becomes available to the party whose product has been blocked by customs. Again though, you want to avoid these cases if at all possible because even if you end up prevailing, you will need to incur considerable time, trouble and money to get there.

The difference between the cases we have handled and the Apple one, however, is that in our cases the Chinese companies threaten to get an order blocking our client from having its product made in China, but they never do. They never do because they know the cost of doing so is high and the likelihood of their getting such an order and having that order stick is very low. I read somewhere once that something like 70 to 90 percent of all Chinese design patents get invalidated when challenged. These Chinese companies know that if we were to challenge their design patents we would prevail, so why spend big money only to lose in the end. The Chinese company’s power comes from the design patent threat, not from reality.

In the Apple case, the Chinese company has brought a lawsuit and by doing so it has increased its threat value. Did the Chinese company do this because it has a valid patent? Or is it because it views Apple has having such deep pockets it has decided to go strong in the belief that doing so will get Apple to pay big money in settlement to end the issue? I don’t have the answers.

Most importantly, I predicted both in my blog posts (“Based … on our own history with China design patents, I am guessing Apple will prevail in the end”) and in a CNBC article in which I was interviewed, that Apple would eventually prevail.

Well guess what. Apple just did prevail before the Beijing Intellectual Property Court: “The court ruled that the regulator {that previously ruled against Apple] did not follow due procedures in ordering the ban while there was no sufficient proof to claim the designs constituted a violation of intellectual property rights.” China design patents: fear them just enough to get your own as an offensive weapon, but not too much.