Photo of Dan Harris

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.

China bribery. Don't. Just Don't.
China bribery. Don’t. Just Don’t.

Earlier this week I gave a talk before the Chinese Chamber of Commerce in Cleveland. One of the things I talked about was how it is wrong to contend that contracts are not needed in China because of court corruption.

I talked of how most Americans don’t understand court corruption. Otherwise they would not so frequently say that there is no point in bringing a lawsuit in such and such a court because it’s corrupt. Corruption influences (sometimes greatly) court cases, but neither as often nor as much as so widely believed. When dealing with court corruption, one has to be sensitive to location, type of case, and relative influence of the parties. In other words, a $300,000 breach of contract case between a foreign company and a Chinese private company is much more likely to get a “fair trial” in a Chinese court in Shanghai than a case against a massive China State Owned Entity involving stolen trade secrets that might have military applications in the small Chinese city in which that SOE is based and employs a large percentage of the town Sometimes this is due to corruption and sometimes this is due to what lawyers commonly call getting “home-towned.” There are Wall Street lawyers who are as afraid of going to trial in a rural Alabama court as US companies are of going to trial in China.

But when Americans think of a corrupt court they usually think of the opposing party paying a judge in cash for the ruling of their dreams. But it is rarely that simple. I was taught the “finer points” of court corruption by a very smart, very honest Russian lawyer friend of mine who practiced law in the Russian Far East. What he explained to me works pretty much the same way in most of the other emerging market countries of which I am aware with a less than pristine court system — or at least that is what lawyers in some of these countries have told me.

My schooling on Russian court corruption was in “real time” as it involved a real case and a real client. It has been many years so I may be a bit off on the numbers and it is possible things have changed in Russia since then and it is also possible this information held true only for this one region in Russia. It is also possible the Cleveland Cavaliers will sign me to a multi-million dollar contract within the next few months.

My client had a contract with a Russian company under which the Russian company clearly owed my client $2 million, but the Russian company was refusing to pay and all but challenging my client to sue it in a Vladivostok court, the only place my client could pursue its claims. Legally, my client’s case was about as close to a slam-dunk winner as you are likely to see in a business dispute. But my client was rightfully concerned how corruption would influence its case.

Our Russian local counsel explained how we should view the case, corruption warts and all, and he did so by explaining the following:

Nine of the fifteen judges are corrupt. The other six are not. But I still like our case even before one of the corrupt ones. First off, there is a very good chance the opposing side will not offer any bribe at all. Second, our case is so strong it is possible that even if offered, none of the corrupt judges will take it. Third, if any do take the bribe, it will be really high because no judge wants to be thought of as corrupt and ruling against our client in this case will definitely raise eyebrows.

The Russian company will probably need to pay the lower court judge approximately $300,000 for the ruling it wants. And then we can appeal to a three judge appellate panel, made up of judges from throughout the province. A lower percentage of the appellate judges are corrupt and those that are require large payments, especially on a case like this. The odds of all three of our appellate judges being corrupt are quite low. The odds of the Russian company having close connections with any of the appellate judges are lower than when all of the judges are based in its home city. This means that to try to bribe two of the three judges will be very risky and very expensive. Risky because people sometimes do go to jail on bribery charges. Expensive because we are talking about 3 appellate judges. So in the end, I estimate that for the Russian company to be assured of winning through the appellate level, it will need to pay maybe a million dollars. And that ignores our ability to at least try to appeal to the Supreme Court in Moscow.

These numbers are just estimates but this means that even though corruption is a factor, we cannot allow our client to panic in the face of it. We can settle this case on good terms and that is what we should be trying to do. The Russian company would rather pay us to eliminate risk than pay a bunch of judges and take on new risks.

We ended up settling the case and at a figure not all that much lower than what it would have been in the United States.

I am not by any means trying to minimize the impact of corruption; I am merely trying to show that it oftentimes is not as overwhelming as it may initially appear.

Note also that we never discussed our client paying a bribe to anyone. That is always the worst alternative because it puts people at real risk of going to jail without anything close to a guarantee it will even work. When our Russian lawyer said that people in Russia rarely get arrested for bribery, he was talking about Russians, not foreigners. Do you really think you have the savvy to engage in risk-free bribery in a foreign country? I can tell you that none of our firm’s China lawyers would ever make that claim.

When I talked about the above at my Cleveland talk, an audience member, Kimberly Kirkendall, commented that in her experience many of the times where she was aware of someone having paid a bribe in China they had done so essentially because they wanted to, not because it was necessary they do so. We then talked of how some companies seem almost to delight in paying bribes but that our China lawyers — believe it or not — had never once been asked to pay a single bribe in China, even though we are constantly dealing with the Chinese government to register trademarks and copyrights and WFOEs and Joint Ventures. Kimberly commented on how foreigners sometimes brag about paying bribes and how troubled she was by that. I then mentioned how stupid and risky it is to pay bribes in China.

I spoke with Kimberly after the event and learned of her extensive experience and of how she had recently written on China bribery. When I got back to my computer I read what Kimberly had written and I loved it, and with her permission, I am running an excerpt from it below.

 

In China 30 years ago it was very common to incentivize someone to do their job by giving them a gift. Why? The China of the late 1980’s and into the 90’s was a communist economy that relied on 95% government controlled business. And in that communist economy there was very little difference between the salary for the GM of a factory and the guy who mopped the floor. So how were they compensated for their relative value to the organization? The GM could “gift” some of the company’s products to someone else, who often then re-gifted that to someone they wanted to influence and so on and so forth. By gifting them, the GM was able to get a slightly larger apartment, or their child in a better school, or some other economic benefit. People recognized their relative power in the economy by giving and/or accepting gifts. Sometimes cash, but frankly there wasn’t a lot of cash to go around. Much of this was actually bartering, trading your goods/access/influence for someone else’s.

In the booming late 1990’s and into the early 2000’s, as people were allowed to own a business in China, things changed a bit. How do you move a government owned or controlled economy to a privately held one? Where do individuals get the money to buy apartments or companies if they weren’t making much cash beforehand? In this period of transition there were many instances of people using their power and influence for economic gain. From how these government companies were taken private (and ownership and shares divided up) to how people came up with the money to buy apartments or build new ones. In this environment people in high positions saw the money being made and they wanted their share – and now there was the cash to pay them.

Towards the late 2000’s and into today, we are looking at a China where many people (but not all) are in a position to make money in direct ways. Through entrepreneurship, increased education and wages, investment, taking risks on new ventures, or changing jobs to accelerate their careers. Much of the population are no longer stuck in a powerless place where bribes are their only way to obtain value from their position of authority. Certainly it still exists, and there are still people who feel that they can’t get ahead so they exact a little extra money on the side.

When I hear that a US company has used bribes I start wondering about the reason for the bribe. Was it a payment to someone to do his or her job or a payment for them not to do their job? In almost every instance these days, it seems it is the foreigner who initiates the bribe. The below examples of matters on which I personally worked highlight the important difference between these two reasons.

Example: A U.S. company was importing components from China, using both its own team in China to find suppliers and control the orders and a trading company. The US management came to be for help in figuring out why some in their company were claiming that they needed to use a trading company for some of their China business, even though the trading companies were increasing costs by taking their own payments from the transactions. They wanted to know why they were paying a trading company to buy and export goods when they could do all of that themselves. It turned out that a group within the company wanted to utilize lower HTS custom codes for export to save money and Chinese Customs didn’t agree with that custom code classification. The US company was using the trading company to pay China customs a bribe so they could export their products under the “wrong” code and save money. In other words, there was no need to pay bribes, just a desire.

Example: A company was setting up a factory in China and the local government was concerned about air emissions from its manufacturing process. In the U.S. the company had shown that emissions were well within range of EPA guidelines. The local Chinese agency was not convinced and asked for more tests and documentation. The company was left with options – see if there was an “economic incentive” that would encourage the regulatory official to approve the paperwork, or spend a few months and thousands of dollars doing the research to prove their manufacturing met the guidelines. They chose the “economic incentive” route. Again though, an example of a company choosing to pay a bribe out of a desire to get a government official not to do his or her job, not a bribe necessary to get that official to actually do his or her job.

The point I am trying to make here is that the excuse foreigners make about having no choice but to pay a bribe rarely if ever holds true. The foreign companies I hear about paying bribes had plenty of choice; they simply chose wrong. They were not responding to a request for money but offering money as an incentive for a Chinese worker to deviate from his or her professional responsibility.

China employment laws and foreign companies. One tough mudder.
China employment laws and foreign companies. One tough mudder.

The China Labor Bulletin just did a post revealing something my law firm’s China lawyers (especially our China employment lawyers) have sensed/felt for quite a while: China employees increasingly know their rights and have no compunction about doing what they can to enforce them:

While latest national LDAC case data compiles data only up to 2015, local government reports reveal more recent statistics, and tell stories of the rising rights awareness of workers.

A whitepaper on labour disputes from Guangzhou noted the increasing diversity of grievances raised by workers in recent years. Unpaid social insurance, for example, account for over 40% of all arbitration cases over the past three years. Women workers are an increasing portion of all cases, and are taking action against unequal treatment, illegal firings or wage cuts during pregnancy or maternity leave, and discriminatory hiring practices.

Though this article does not specifically address employment cases against foreign companies doing business in China, I would venture to bet that employment disputes between Chinese employees (and expat employees as well) and foreign companies have increased at an even faster pace. We see this in the number of emails we get from both employees (expats mostly) seeking to sue and from employers threatened with lawsuits. In virtually every employment dispute we take on as counsel, however, the parties eventually settle, meaning they never become a part of any Chinese government statistic.

I wrote on this last year for Above The Law, in an article entitled, China Employment Disputes: Settle, Settle, Settle: Attorney Dan Harris says there’s only one way to deal with labor disputes in China. That article started out with the following:

Every few weeks, one of our China lawyers gets an email from a foreign company (virtually always a WFOE) that is in a dispute with one or more of its China-based employees. These foreign companies are usually surprised to find themselves in such a dispute because they are of the view that they did nothing wrong. They too often believe that hiring my law firm will consist of us spending an hour or two reviewing the facts and the law and then telling them that they did nothing wrong and then making the case go away.

The only difference today is that we are getting those emails every single week, and usually more than one. But what hasn’t changed is what causes foreign companies to get themselves in this situation, nor what they need to do to get out of them. The two leading causes for the employment disputes we see are a failure to have a well-crafted set of Rules and Regulations combined with maladroitly handled employee terminations. See China Employee Termination: Avoid These Mistakes. We also have seen no slow down in foreign companies getting into big trouble for having “employees” in China without their actually having a China WFOE to serve as the employer. See Doing Business in China with Deportation or Worse Hanging Over Your Head.

Bottom Line: China wants foreign companies doing business in China for financial reasons and those companies that are not fulfilling their China financial duties, be it via taxes or employee payments are at risk.

China litigation
Owed money by a Chinese company? Sometimes you just have to sue.

Nearly every week, an American or a European company (or sometimes an Australian company) will write to one of our China lawyers asking what it can do to get paid on its contract. The amounts typically owed are between $50,000 and $250,000, but sometimes they run deep into the millions.

These companies writing us are not our law firm’s existing clients because we so strongly advocate not doing deals with Chinese companies without getting a substantial payment upfront. See Want to Get Paid by a Chinese Company? Do These Three Things:

Demand a large amount upfront and make clear both orally and in your contract that you will not begin work or ship your product until you receive the full amount of this initial upfront payment. Having a large upfront payment works both to prove good faith by the Chinese side and to prove that the Chinese side is able to make large payments outside of China. China’s currency, the renminbi, is still a nonconvertible currency and any time a Chinese entity wants to send US currency to a foreign entity (greater than $50,000 a year), it needs approval from the transmitting Chinese bank. This generally requires the parties to have executed a contract (in Chinese) for goods or services that are acceptable for foreign entities to provide, and that the foreign company has submitted a formal invoice in a form acceptable to the bank — because the bank in turn usually needs to get approval from government authorities. For the specifics on what is required to get paid by a China company, check out Service Companies In China. How To Get Paid.

These companies writing us for help in getting paid are obviously past the point where a well-crafted contract can help them and they want to know exactly what they should do to get paid. One of our China attorneys recently responded as follows to such a company with very large amounts owed to it by two Chinese companies, one a State Owned Entity (SOE) and the other a privately-held Chinese entity (I have modified the email a bit to hide any possible identifiers):

Usually the best way to collect money owed to you by a Chinese company is to file a lawsuit. Otherwise, the Chinese company will probably just ignore you. The problem, of course, is that lawsuits by WFOEs against SOEs are not favored in China. If your claim has any defect, that defect will normally defeat the claim. However, filing a suit can provide you with leverage in any settlement negotiation. Your case against the privately-held company will probably be easier. But for both cases, much will depend on the quality of your contract and until we review those contracts we would only be guessing at your chances.

Sending demand letters to Chinese companies tends to be a waste of time, though they often make sense to confirm the default, if such confirmation is required under the relevant contract. Most Chinese companies ignore demand letters and this is especially true of SOEs. These two companies have been the clear decision not to pay you and unless and until you sue them, they probably will stick by that decision. In fact, sending a demand letter from your lawyer is seen by many Chinese companies as a sign of weakness. They are of the view that if you are really going to sue them, you would do so and not just send out letters. Those who send demand letters are too cheap to hire a lawyer to do anything more.

So that leaves filing a lawsuit against these two Chinese companies. But lawsuits are rarely inexpensive and filing one will permanently affect your relationship with these buyer and it could hurt your standing in the _______ industry in general. Litigation should therefore be initiated only after careful consideration. I cannot assess your chances of prevailing in litigation until after a review your contracts and other documents and get a much better sense of the entire factual situation. But I can tell you that just like in the United States, litigation in China is expensive (though usually considerably less expensive than in the United States, slow (though usually considerably faster than in the United States) and uncertain. So pursuing litigation is not a course to be taken lightly. However, when you are being ignored, it is the only affirmative action you can take.For what it is worth though, the World Bank recently ranked China as the fifth (5th) best country in the world in terms of contract enforcement!

Using an “intermediary” is a standard “old school” Chinese practice. Provided no bribe is given to this intermediary and provided this intermediary acts pursuant to China law, using such an intermediary is not illegal. [This was mentioned because the company owed the money said that someone had told it to collect the debt in this way]. These intermediaries typically charge a percentage of what they collect and you should measure that percentage against the cost of litigation. The problem with using an intermediary though is that you become dependent on the intermediary and your contract with that intermediary may make it difficult or impossible for you to sue your creditor if and when you wish to do so  and you become liable if your intermediary for whatever it does that is irregular or illegal. Most importantly, its chances of success are uncertain and we have seen instances where intermediaries have not only failed to collect, but the things they have said and done have essentially ruined the chances of succeeding in any lawsuit.

Using an intermediary in your case seems particularly problematic for two reasons. How is an “intermediary” going to convince an abusive SOE to pay its bill to you a WFOE? It sounds far fetched to me, but I don’t have all of the facts. Two, you are coming up against a statutes of limitations that may prevent you from ever being able to sue these two companies. The last thing you want to do is miss out on your opportunity to sue because you are bogged down using an intermediary. I do not know enough about your case to tell you how to proceed, but I can tell you that we generally advice against companies using intermediaries to collect on their China debts.

If want me to review the contracts and other documents that would support your claims, I am available to do that.

Cleveland Cincinnati China EventMy Midwest roots run deep (Michigan, Illinois, Ohio, Indiana and Iowa, mostly), so I tend to seize on any excuse to return there. I will have that excuse in droves later this month as I will be speaking on China in three Midwest cities and serving as a “China legal expert” in a fourth.

Cleveland will be first on my Midwest tour and I will be speaking there on June 19 before the Greater Cleveland Chamber of Commerce. Go here to register. My speech is entitled How to Protect Your Business in China, and among other things, I will be discussing the following:

  • How to choose the right China partner
  • How to identify the IP assets you need to protect
  • How to structure your China deal
  • How to draft your China contracts to protect your company and your IP
  • What you should know about China trademarks, patents, copyrights, and licensing agreements
The schedule for this event will be as follows:
11:30 am Registration Starts
12:00 pm Lunch Starts
12:15 – 1: 30 pm Speaking (including a Q and A session at the end)
1: 30 pm – 2: 30 pm Networking Hour
Please come!

Then on June 20 and 21, I will be in Detroit, Michigan (a mere 2 hours by car from where I grew up) as a “legal expert” at Alibaba’s Gateway ’17. This event as being billed as part of Jack Ma’s making good on his promise to help create one million new jobs in America. See Alibaba Takes First Step To Fulfilling Jack Ma And President Trump’s ‘One Million U.S. Jobs’ Promise. My role at this event will be to talk to the media and to SME participants about the legal aspects of selling products to China, especially online. Spoiler Alert: I will mostly be focusing on the need to file for English language trademarks and patents and copyrights in China before selling products there and consider creating Chinese language names and filing for those too. This event has a ton of great speakers and a ton of great breakout sessions and if you can possibly attend, you should.

I then head to Chicago where on June 22 I will speak at the 13th Annual Product Liability Prevention Seminar. I have spoken at this conference many times and always enjoyed it because of the other speakers and the attendees, most of whom are involved with product manufacturing around the world. My talk will focus on the legal aspects of China manufacturing, emphasizing the role of contracts and IP.

Then it’s on to Cincinnati, where on June 23 I will be giving a lunchtime talk before the Greater Cincinnati Chinese Chamber of Commerce on how to use the law to protect your business in China. Go here to register. My talk will be followed by a Town Hall discussion moderated by my good friend Jeff Holtmeier, with whom I have worked on many a China deal, mostly involving health care and technology. Jeff is the real deal and I am very much looking forward to being on a panel with him. So again, please come!

Then it’s back to the salt mines….

China negotiationsWay back in 2012, my good friend Andrew Hupert wrote a great book on negotiating with Chinese companies: The Fragile Bridge. And for the last five years, whenever anyone asks me what book they should read to learn more about how to negotiate with Chinese companies I always recommend The Fragile Bridge. Earlier this week, someone to whom I made this recommendation emailed me with the following:

Thanks for recommending The Fragile Bridge to me. Took me quite a while to get started with it but once I did, I couldn’t put it down. Hupert clearly knows how to handle Chinese companies and I appreciated how how he does not drone on for an extra 100 pages, as so many other others who write about China feel compelled to do. Any particular reason why you never recommended it on your blog?

Whoops. no particular reason other than oversight.

Here’s the thing, and somewhat in my defense: I hate writing book reviews. My father was an English professor and so I learned at an early age that good book reviews must consist of more than “loved it, buy it and you will too.” And yet writing much beyond that is a ton of work. Maybe worst of all, it requires reading a book slowly and taking notes, which contrasts with my style, which is to read books as quickly as possible with no note taking whatsoever.

When I tell people how tough I find writing book reviews, they always wonder why it would be any tougher than just writing a blog post. Most of my blog posts come fast to me because they mostly consist of my putting in writing what I tell clients as part of my work, or what I hear other China lawyers in my firm tell clients as part of their work. Or else it’s just me pulling from my own emails to clients or, better yet and easier still, my pulling emails from the other China attorneys in my firm to clients.

But writing a book review is real work for which there is no bill at the end. That’s what I call tough.

But I do agree that I should have reviewed Fragile Bridge a long time ago, so here goes.

Great book. Loved it. Uber-practical. If you will be negotiating with a Chinese company, you must buy it. Now!

But wait, there’s more. Amazon describes the book as follows, and I swear to you that its description is 100% spot on, and here it is;

Written by an American for Westerners negotiating in China, “The Fragile Bridge” dispenses with politically correct euphemisms and ivory tower pseudo-psychology. The Chinese want your technology, intellectual property and product designs. You want their markets, resources and labor. Knowing which 1,500 year-old philosopher uttered what esoteric phrase won’t help you safeguard your assets or keep your JV operating, but learning from the lessons of dozens of successful Westerners who have survived the China challenge just might. Andrew Hupert’s even-handed analysis uncovers the sources of conflict in Western-Sino negotiation and anticipates the trajectory that business disputes travel. “The Fragile Bridge” offers readers practical, insightful advice for avoiding, containing and managing China business conflicts of all shapes and sizes. Case studies and examples illustrate each observation. The book ends with a list of highly practical best practices that are appropriate for newcomers and “Old China Hands” alike.

How can you not want to read a book described as per the above? I particularly love the line about how “the Chinese want your technology, intellectual property and product designs,” because I’ve been known to start one of my China speeches with something like the following:

Big companies in China want to steal your IP. Small companies in China want to steal your IP. Government-owned companies want to steal it. Privately held companies want to steal it. And even that company that is run by someone who invited you to his daughter’s wedding—that company also wants to steal your IP. This is not a reason not to do business with Chinese companies, but it is a reason for you to be sure to do business the right way with those companies.

I gotta love an author who thinks like me.

Anyway, just buy the book.

 

China WFOE A while back (I am being intentionally vague here to avoid identifying anyone) a U.S. client company contacted me about shutting down its China WFOE and/or terminating all of its roughly 20 China employees in one fell swoop. The U.S. company had discovered rampant corruption among its employees and its CEO wanted all of this to be done “by tomorrow.” I am not kidding!

My response (modified to hide any identifiers and ` into one email) was as follows, with the client identified below as “Company A.”

I spoke with Grace Yang (our lead China employment lawyer) and with Steve Dickinson (our lead China corporate lawyer) and both agree that there is no way we can provide you with anything even approaching sound advice by tomorrow.

You essentially have two choices. One, you slink away in the middle of the night and neither Company A nor anyone who China might ever identify as having been associated with Company A ever goes to China again and Company A never conducts any business with China again. If (as I pretty much know will be the case) this does not appeal to you, then you must provide prior notice to the government because what you are proposing to do almost certainly constitutes what China calls a “mass layoff.” We will need to confirm with the authorities that such notice will be required because the definition of mass layoff varies depending on the local labor bureau. But we are virtually certain it will be.

Once we know exactly the layoff situation with which we are dealing, we can work with you to figure out the best, the fastest, and the cheapest way to accomplish it. If you have any employees who are pregnant or any employees for whom this will present a significant financial hardship, this will get even more complicated.

In addition to the employee issues, you also will need to work with the government in shutting down the WFOE itself and that can be an even longer and more drawn out process than dealing with the employment issues. We typically bring in accountants to assist with WFOE closures because taxes are so central to this. We have worked with a couple of very good accounting firms in ___________[Chinese city] and we would want to bring one of them in for this closure. This is going to take a substantial amount of legal work on our part, gathering up the facts, researching the law, and meeting with government officials.

What I can tell you at this point is that how we handle this will very much depend on the facts. It will depend on the size of the WFOE (my client contact did not even know how many employees the company had in its China WFOE]. The reason for the layoff. The types of employees you have: some may need to be differently than others. The location. The economy in your location. The labor bureau office. Your company’s history. Your company’s plans for the future, including not just China but other countries. I could go on and on and I’m sure Grace and Steve can and would add many more things to this list once we get going on this. We have seen these sorts of terminations/shutdowns done right and we have seen these terminations/shutdowns done wrong and usually when they are done wrong really bad things happen, like people being held hostage in China or seized by the government when they go over there a few years later. When they are done right, they take a lot of thought and a lot of varied expertise and, most importantly, a lot of time.

If what you are proposing is a mass layoff — and we are virtually certain it is — there are certain procedures that must be followed, and those procedures vary by district, by city and by province. If it is a mass layoff, almost everything will likely need to be made public and the language used in the public notice thus becomes absolutely critical. The last thing you want is for your terminations to become this week’s big issue for labor activists. We will need to meet with the employee/union representatives or all of the employees to discuss severance. What can go wrong there? Well, one of the last times I was in Beijing, the talk of the town was an investment banker who went to meet with employees in a situation not all dissimilar to this, but without a plan. He was literally beaten to death. That’s obviously a rarity, but it does show the need to have a well thought out plan in place before doing anything.

The labor authorities will get involved and they have tremendous power to correct anything they think wrong with the WFOE’s mass layoff proposal. And the last thing you want to do is start out too harsh and thus anger them from the get-go. On the flip side, if we can win over the local labor authorities with a good plan, we can likely get them to assist in the whole process.

The above is mostly just the labor issues. Closing down the WFOE will have its own issues, mostly relating to first clearing up the labor issues, and any debt and tax issues. The tax issues tend to be worst of all because once a company starts closing, taxes start coming out of the woodwork. That is why we also will almost certainly want to bring in a high level yet local tax accountant. Oh and employees almost always file a claim against the WFOE regardless of how good a severance package they get; they nearly always think they deserve more. Which is why it will almost certainly be worth it for you to pay each of them enough to get each and every one of them to sign a settlement agreement in addition to everything else. I understand why you do not want to pay most of your employees anything right now, but it will probably end up making financial sense to do so.

Our China lawyers continued working with this company on a strategy and as time went on, their anger subsided and they chose not to shut down or layoff all of their China employees. But for anyone out there thinking of shutting down their WFOE or laying off all or nearly all of your China employees and needing some ultra-quick advice, the above should do, with the usual proviso that China’s laws on this sort of thing are always changing and always hyper-local.

China hostage situationsWe used to write frequently about Westerners being held hostage in China over debts and over layoffs. Then we pretty much stopped.

We stopped because these posts always seemed to anger someone. Actually many someones. And they did so without really pleasing anyone.

But I am getting the strong feeling that the number of hostage situations involving Westerners is increasing at the same time the Chinese government and its police (both national and local) are more concerned with maintaining harmony among its own citizenry than about one foreigner being held in a mediocre hotel room. Getting a Chinese company paid on a debt will do more to advance social harmony than busting in and freeing a sole foreigner.

So why am I writing about it now? I can only very vaguely explain, but let’s just say that I am aware of a foreign company that had one of its employees seized in China over an alleged debt and it was anything but pretty.

But what I can tell you — what I will scream to you — is that HOSTAGE TAKING in China is real. Most importantly, I can tell you the advice my firm’s China lawyers give to our clients laying off workers in China or closing a facility in China or in a financial dispute with a company in China is — if possible — to stay outside China when negotiating resolution of these issues and to heed the following:

  • If you are in a financial dispute with a Chinese company, the best thing to do is not go to China at all. if you have to go or if you truly believe there is little risk, at least take precautions.
  • If you must go to China, think about using a bodyguard or two and think very carefully about where you stay and where you go. Most importantly, be careful with whom you meet. If you owe money to a company in Xiamen, meet with them in a hotel lobby in Shanghai or Beijing and not in their conference room in Xiamen.
  • Consider preemptively suing the Chinese company that claims your company owes it money. This allows you to plausibly claim that you (or your employee) have been seized not because your company owes a debt, but out of retaliation for having sued someone. If you are going to sue, carry proof of your lawsuit with you at all times while you are in China. This shifting of reasons can be very powerful when seeking police help.
  • Do not believe sending someone who is not a company owner to China will make any difference.

Hostage situations in China are rare, but not as rare as most believe. In the end, you are the one who knows the situation and the Chinese company(s) with which you are dealing, so you are the one who must make the decisions on whether to go or not. All I am saying is to at least be mindful of the risks.

 

China AttorneysBecause of this blog, our China lawyers get a fairly steady stream of China law questions from readers, mostly via emails but occasionally via blog comments as well. If we were to conduct research on all the questions we get asked and then comprehensively answer them, we would become overwhelmed. So what we usually do is provide a super fast general answer and, when it is easy to do so, a link or two to a blog post that may provide some additional guidance. We figure we might as well post some of these on here as well. On Fridays, like today.

One of the questions we often get is why we act as though there is no corruption in China. This question is often followed by a statement along the lines of the following:

My friend who has been in China 38 years tells me that China is the most corrupt country in the world and that no contract is worth the paper it’s printed on. Is this true?

No Virginia, it’s not true. Transparency International’s Corruption Perceptions Index, widely considered to be the most accurate measure of worldwide corruption, ranks China at 79 out of 176, putting China squarely in the top half of all countries worldwide in terms of a lack of corruption. Perhaps more importantly, the World Bank ranks China at number 5 in its measure of enforcing contracts!

 

China trademark lawyersA number of Chinese trademark law firms have of late been trying to drum up American clients on China trademark matters. I say this because our own China trademark lawyers have been getting a steady stream of emails from U.S. lawyers and companies contacted by these Chinese trademark law firms. The Chinese law firms are writing to US lawyers and companies to alert them of trademark filings in China of the same trademarks owned by the company in the United States. These emails from the Chinese trademark attorneys to U.S. trademark attorneys usually go as follows:

We, _________ are a specialized Chinese IP law firm. Our trademark research team took note of the following marks from a recent issue of the Chinese Trademark Gazette published on May 6, 2017, open to oppositions before August 6, 2017, Beijing time, NOT extendable. Particulars of the marks are listed below for your reference.

Gazette Clipping

IMAGE

Provisional Approval No.

2——-

Class

7

Goods

Capstans; Pulleys; Derricks, etc.

Application Date

June 14, 2016

Applicant

___________ Outdoor Supplies Co., Ltd.

Address of Applicant

________City, ________ Province, China

For your information, we, ______ IP, are a Chinese IP law firm and member of various international organizations, including INTA, ____, ____, ____. The majority of our clients are based in China, which enables us to regularly send business to our foreign associates. We will be more than pleased to establish reciprocal relationship with your esteemed firm.

We look forward to your reply. If you are NOT interested in our reporting emails of this type, please feel free to let us know via return and we will refrain from bothering you any more, your understanding is highly appreciated.

The U.S. trademark lawyers — oftentimes not knowing whether the email they just received is a scam or not — then write us asking us what is going on and what their client should do. Our response is usually something like the following:

  1. Yes, something is actually happening with the marks in China. On June 14, 2016, the Chinese company _______ Outdoor Supplies Co., Ltd. filed applications for the stylized “_________” mark in Classe 7. I have attached copies of the relevant trademark information. Though it’s in Chinese you can see that the stylized mark is an exact copy of your client’s. The marks have been approved by the CTMO examiners and were published in the May 3, 2017 edition of the Trademark Gazette. If three months pass and no one files an opposition, both marks will proceed to registration.
  2. Your client could indeed file an opposition to one or both marks. But unless the Chinese company has or had a business relationship with your client, the odds of a successful opposition are low. China is a first-to-file jurisdiction and the grounds for a bad-faith filing are limited. It is unlikely your client’s mark would be considered “well-known” enough to convince the CTMO that these filings were in bad faith. The Supreme People’s Court did issue some guidance suggesting China would be taking a harder line on trademark squatters, but we haven’t seen much difference in the way trademarks are examined. Note though that these oppositions are relatively inexpensive.

It does not appear the Chinese company is a trademark squatter per se; they only have two other trademarks (both registered) in their name. My guess is they actually intend to use your client’s mark in China to market or sell their own goods.

Your client has the following options at this point:

  1. File an opposition to one or both of the cited marks. If these marks are important to your client and they understand the low odds of success, they probably should do this, in large part because the costs of their doing so are so low.
  2. Contact the Chinese company and attempt to purchase the mark.
  3. Wait three years to see what, if anything, the Chinese side does with the mark. As you perhaps already know, if the mark has not been used in commerce for three years it can be cancelled for non-use. See China Trademarks: When (and How) to Prove Use of a Mark in Commerce.

Please let me know if you have any questions or would like to discuss further.

The real key is what we are always saying here on this blog: Register your trademarks in China. Like today.

Have you gotten one of these? What did you do and with what results?

Amazon lawyers
How to keep duplicates off Amazon

American and European companies that have their consumer products made in China constantly have to contend with their own products or a counterfeit of their own products showing up on Amazon. Our lawyers frequently get inquiries from companies that sell their products on Amazon and have seen their sales fall by 30 to 80 percent because they are now having to compete with duplicate/counterfeit products sold on Amazon. These inquiries spiked when Amazon started encouraging Chinese companies to sell their products on Amazon.

The following are five key things you can do to reduce the risk of your product showing up on Amazon and to better position yourself to remove those products if they do show up.

  • File for United States Trademark Protection. Amazon is quick to remove products that clearly violate a registered U.S. trademark. If you ask Amazon to remove a product because it “duplicates” yours, but it does not use your trademark, Amazon virtually never will do so. This is true even if the offending product violates one or more of your patents. In our experience, Amazon typically will not take down cloned products without a court order. 
  • Block your China Manufacturer From Competing with you. In Your China Factory as your Toughest Competitor we noted how our China attorneys have become fond of pointing out to our clients, “since you will essentially be educating your Chinese manufacturer in how to compete with you, you need contracts that will at least limit what it can do when it does so.” The most deadly copiers of all are those that are literally making your exact product. How do you compete with that if they are selling it for 50% less than you are?
  • Copyright your key photos in the United States or in China or in both countries. Counterfeiters are often lazy. It never ceases to amaze me how often Chinese copiers will use our client’s own photos (oftentimes downloaded straight from Amazon) on Amazon to sell their products. We have on many occasions been able to remove entire listings because the photo or photos on those listings violate our client’s registered copyright in either the United States or in China. Technically, in both the United States and in China, you do not need a registered copyright to hold the copyright to a photo, but you are far more likely to get a listing removed from Amazon for copyright infringement if you have a registered copyright. A registered copyright in one country (either China or the United States, or even some third country) should be enough for this, but where you choose to register should depend on a whole host of factors. It is true that if you remove a listing for copyright infringement of one of your photos, the company that violated your copyright can just put up a new listing with a new photograph that does not violate your copyrights. Surprisingly enough, we have found that they generally just move on instead, either because they were blocked by Amazon from listing or because they simply choose a different product to push.  See China Copyright Law: We Need to Talk.
  • Build your brand, be distinctive, and change often. This is non-legal advice, but I have found that companies that work from day one on building their brand and their image and have well-crafted Amazon listings are simply more difficult to copy. Being difficult to copy not only means that you will be copied less often than your competitors but it also means that when copied the negative impact on your business will be less. And if you are constantly changing up what you do, you can sometimes stay at least somewhat ahead of your imitators.

What are you seeing out there?