China trademark registration
Do these look similar to you? Because they sure do to me.

We first wrote about the Under Armour vs. Uncle Martian dispute last May. At the time it seemed like just another story about a blatant Chinese ripoff, destined to be forgotten with the next month’s news cycle. But the story has kept on going, and was back in the news recently with the report that Under Armour had conclusively prevailed in its trademark infringement case against Tingfeilong Sporting Goods, the Chinese sports manufacturer behind the “Uncle Martian” brand.

According to Under Armour’s lawyers, on June 19, 2017 the Fujian People’s Higher Court issued an injunction requiring Tingfeilong to stop using the infringing “Uncle Martian” trademarks, destroy all infringing products, pay RMB 2,000,000 in damages, and publish a statement to “eliminate the adverse effect” of its infringement. This ruling followed a preliminary injunction issued on November 2, 2016.

The court’s ruling is surprising in two ways. First, it’s surprising that the court issued an injunction at all. Chinese courts are known for being reluctant to issue injunctions because they don’t have the same enforcement power as U.S. courts (China has no equivalent of the U.S. Marshals Service), and issuing an injunction that they know will be ignored just makes them appear weak.

Second, it’s surprising that Tingfeilong continued using its Uncle Martian logo — the infringement is about as blatant as you can get short of an outright copy, and the social media commentary in China was withering. When I wrote about this case last year, I speculated that Tingfeilong’s strategy was to get a bunch of free publicity for their cheesy product launch and the “Uncle Martian” name, then quietly drop the infringing logo and continue selling products using the “Uncle Martian” name. That may still be their strategy, but the penalty may be enough to put them out of business. Assuming they end up paying it. Tingfeilong has appealed the June 19 ruling, and I could imagine a settlement that involves Tingfeilong agreeing not to use the infringing logo so long as they can still use the “Uncle Martian” word mark. Or maybe other shenanigans are afoot – according to the CTMO website, the “Uncle Martian” word marks are now owned by another Chinese company, Quanzhou Changwan Trading Co. (泉州昌万贸易有限公司).

In an interview with Law360, Under Armour’s US counsel offered three lessons from the case. I’ve paraphrased those lessons below in underlined text, with my further comments afterward in italics.

  1. Chinese courts are willing to grant injunctions. Obviously this case is a step in the right direction, but one case is hardly enough to establish a trend. China is not a common law system and a ruling by the Fujian Higher People’s Court’s does not set a precedent. That we even have to discuss this point is noteworthy; in any court system providing meaningful injunctive relief, this case would be a slam-dunk. But it’s not the case that this sort of relief will be readily and easily available. As I understand it, the key to this case is the significant and indisputable evidence of infringement presented by Under Armour at the time it requested an injunction. To submit that amount of evidence takes a lot of time and effort – it’s not just pasting a bunch of screenshots into a complaint. Note that the Uncle Martian knockoffs were first announced last April, and the preliminary injunction wasn’t issued until November. I’m sure Under Armour would have loved to have a TRO in May – as would have happened in the US or EU — but there’s no way they could have prepared the evidence in time.
  2. Local counsel is crucial. Unquestionably true. Non-Chinese firms are not allowed to practice law in China, so it is legally impossible to proceed without a Chinese local counsel. And as with any case here in the US, the better the local counsel, the better your odds. But as the Law360 article implies, to an increasing degree in China what makes local counsel “good” is not their connections with local government officials or their guanxi but rather their expertise in the legal field at issue. That is: if you have a trademark infringement case, hire a firm that excels at IP and has a history with those cases. 
  3. Chinese courts outside Beijing, Shanghai, and Shenzhen are issuing sophisticated, consistent legal rulings. Again, though this ruling is certainly a step in the right direction, one ruling does not make a trend. And the facts in this case were pretty much served up on a silver platter for the court. It would be a stretch to call this a sophisticated ruling, when it was obvious to just about everyone who commented on social media that this was trademark infringement. Another key point is that if you want any shot at enforcing a court ruling in China, you need to file your case in a court with jurisdiction over the defendant. If the company knocking off your products is based in Xi’an, you probably will need to file in Xi’an, like it or not. It should go without saying that you will be better off filing in a second tier city court that has jurisdiction than getting your case tossed out of a court in Shanghai for lack of jurisdiction. 

I would add one additional takeaway, which is implicit in the commentary on the Uncle Martian ruling and hopefully second nature to anyone reading this blog. The only reason Under Armour was even in a position to file this lawsuit was because Under Armour had already registered its trademarks in China. This was not a case of an American company trying to prove that its trademarks were famous in China; this was simply a company enforcing its trademark rights that already existed.

China attorneys One of our China lawyers got a weird call a few weeks from a somewhat distraught clothing manufacturer who had just learned that products his company was having made in China may in fact have been made in North Korea. This person wanted to know whether if that were the case whether he might go to jail. When we told him we didn’t know whether it would be illegal or not and that much would likely depend on how much his company knew about the North Korea connection and when, he very quickly lost his ardor for hiring us.

I thought of that call today while reading an article entitled, North Korea factories humming with ‘Made in China’ clothes, traders say. The article essentially says that some clothes that bear a “Made in China” label are actually being made in North Korea. And some are being made in China by North Korean “guest” workers. The degree of culpability for this sort of thing usually ranges roughly along the following spectrum:

  • Those who know and approve of their products being made in North Korea yet labelled “Made in China.” These companies no doubt like the cost savings.
  • Those who don’t want to know where their products are made and make zero effort to prohibit their products being made in North Korea and make zero effort to monitor where their products are being made.. These companies no doubt also like the cost savings and courts tend to categorize them as “having known or should have known.”
  • Those who are actually making a reasonable effort to make sure the products they are sourcing from China are not being made in North Korea.

Now without even discussing whether having your products made in North Korea, funding (albeit indirectly North Korea), and receiving products made in North Korea is legal or not — and this will vary by country — how do you want to be viewed if you are ever before a judge or a jury in your home country? Do you want to be seen as the person/company that tried to stop your products from being made in North Korea, the company that affirmatively didn’t care or the company that encouraged? Now before you answer that, ask any lawyer (no matter what the law is) which category of client he or she would rather defend. The answer to that is obvious. When facing a judge or a jury, the company/person that looks the best is the one most likely to prevail.

Just imagine if opposing counsel gets into evidence some of the things from this article, including how “In North Korea, factory workers can’t just go to the toilet whenever they feel like, otherwise they think it slows down the whole assembly line.” Or that the workers get to keep only ⅓ of their wages, which are only half those in China to begin with, and yet work from 7:30 a.m. until 10 p.m., or 14.5 hours. If facing a jury with those facts doesn’t scare you, I do not know what will.

So when it comes to North Korea how can you be good to look good? It’s like just about everything else with China and with manufacturing: you put how you want your Chinese counter-party to act in your contract (and if you want that contract to actually work, you do these things as well) and you monitor as best you can whether your Chinese counter-party is actually abiding by the terms in your contract.

Simple yet not so simple. But really important.

Your thoughts?

 

China LawyersI often internally cringe when listening to someone back from their first two week trip to China. Those people virtually always come back raving about the place and talking as though it is flawless. Some amazing combination of Paris and Fiji or something.  That’s fine, but what too few seem to realize — and which I am going to have to write about somewhat elliptically for this to stay up on the net — is that at its heart, China can be a risky country. I am not telling anyone to be afraid or not to go there, but I am saying that it ain’t Kansas.

Directly and indirectly from people who call the China lawyers at my firm and from friends who live in China and from what I read, I am sensing there has been an increase in foreigners getting into legal trouble in China. Criminal trouble. Yes, in nearly all of these cases these foreigners did something stupid . . . but still.

Let’s ignore fault and blame for now and get straight to practicalities. Do not contest your cab fare and then get into a an argument with your taxi driver in China. Because if you end up coming to blows, there is a decent chance you will end up in jail and there is even some chance you will end up in jail merely for not paying. I do not know what the odds are in either situation but I do know that it happens more than most people realize.

The same is true of bar fights. In many countries the police will take both inebriated fighters to jail and release them a day or two later. But in China it is not unheard of for the foreigner to face years of prison time.

What should you do to prevent these sorts of problems? One, let it go. You’ve been scammed out of ten dollars? Put that in perspective and move on. You’ve been dissed by some loser at a bar? Walk away. Disarm that person with humor. Be the rabbit. Two, if you are arrested and given an offer that will involve you quickly getting freedom, consider taking it, because it probably will be the last offer you get. And whatever you do, don’t believe it will all just eventually pass over, because if anything it will get worse. Your Embassy or Consulate will usually do whatever they can to help you, but that oftentimes consists of little more than alerting your relatives and giving you a candy bar or two. It’s not that they don’t want to help or are unwilling to help, it’s just that legally there is very little they can do to help.

Whenever we write posts like this we get comments and/or emails accusing us of deliberately scaring off people so as to pad our own pockets. Wrong. Our pockets get padded the more people go to China, not the less. No, we write posts like this because we do not want to see foreigners (mostly young foreigners) get into trouble in China. So don’t. Please.

There are all sorts of other ways foreigners can and do find themselves behind bars for doing things they never realized could lead to criminal prosecution, and the below posts detail some of them:

Your thoughts?

UPDATE: On a somewhat related topic, Foreign Policy Magazine just came out with a hard hitting article on hostage taking to ensure debt repayment, entitled, Hostage Taking Is China’s Small-Claims Court: Everyone in China — including the police — treats kidnapping as just the price of doing business. Wow.

Getting money out of ChinaOur China lawyers have of late been getting a massive upsurge in emails and phone calls from American and European companies and lawyers seeking our assistance in determining the strength of their claims for getting paid on indemnification or settlement agreements or for breaches of investment or merger contracts. China’s tightening of capital controls has made getting money out for these things difficult. To get a better sense of the issues related to China’s crackdown on money leaving the country, start with Getting Money Out of China: It’s Complicated, Part 6 and read the first five parts of this series also. And if you think this is not going to get even worse, I urge you to read China regulators plan to crack down further on overseas deals.

A problem in these situations is that the Chinese government may be preventing the money from leaving or perhaps the Chinese company simply has decided it does not want to pay and is using “China government capital controls” as a convenient excuse. Another problem in these situations is that it can be difficult — often impossible — to know whether payment is not occurring due to the fault of the Chinese company or because the Chinese government has blocked it.

Chinese companies virtually never carry insurance for indemnification or for most (pretty much all) sorts of settlement payments and we are skeptical about their getting permission from the Bank of China to convert RMB into dollars for these kinds of payments. This means your odds of getting money for these things are not so good to begin with, but in every instance in which we have been contacted, the American and European companies (and their lawyers) have already done things to reduce their odds of ever getting paid. In most of these cases, our “sense” is that the Chinese companies deliberately had the contracts written to make payment difficult. And why not? What company that has been sued and had to settle for millions of dollars will not try to set things up so that it does not actually end up having to pay? This holds true with equal force on the indemnification side as well. And on the transactional side, Chinese companies tend to encourage contracts that make payment difficult, figuring that if they do end up wanting to complete the deal, they can agree to a revised contract that will make government approval of payment more likely.

We are seeing this problem of non-payment quite often these days in investment deals as well. The Chinese side will enter into an agreement with a foreign company to buy that company or invest in it. The contract will require the Chinese company make an X dollar (or Euro) payment at some early stage and it oftentimes will also include a liquidated damages provision setting forth what will happen if the deal does not close. The Chinese company never makes the first payment, claiming the Chinese government is not letting them do so. The American or European company then wants to sue for breach of contract damages (one company that contacted us even went bankrupt waiting to get paid!) and/or for the liquidated damages. These companies and lawyers often come to the China lawyers at my firm expecting us to bless their pursuing litigation against the Chinese companies, but in most instances, we throw cold water on those plans by pointing out how the applicable contract(s) make prevailing and collecting on any claim difficult or even impossible.

We typically see two main problems in these contracts, one of substance and one of procedure. The substantive problem is that the contracts’ force majeure clause broad enough to be able to claim that their inability to pay due to Chinese government capital controls is a force majeure. And if the American/European company cannot prove non-payment is for some other reason — and as I stated above, this is usually not possible — the Chinese company may very well prevail on this argument. For more on this issue, check out China Payment Risk. And for some ways you can reduce these risks, check out China Payment Risk, Part 2. The typical procedural problem is the dispute resolution clause. See e.g., Enforcing US Judgments in China. Not Yet.

For you to be able to get paid from China in the situations described above, you need to think about how that is going to happen before you draft your contract, not after you have not been paid. This holds true for any sort of contract with a Chinese company that involves payment leaving China. You need to draft these contracts with extreme sensitivity to China’s hard currency controls, otherwise the Chinese company be able to point to the Bank of China as its reason for not paying and then what can you do? You should not enter into any agreement, even one that seems “purely domestic” without accounting for the payment from China issue and for what is required to get paid under Chinese (not domestic) law and practice.

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.

We work with a number of clients who have goods manufactured in China – everything from plastic beach balls to sophisticated home electronics. We provide those clients with a wide range of business and legal advice, and often also end up drafting agreements for them: NNN agreements, development agreements, mold agreements, manufacturing agreements, and more. In the course of assisting these clients, many will ask if we can help them find a factory to manufacture their products.

The answer is no. First, it could end up being a conflict of interest (or at least appearing like one) if we have a relationship with both sides of a transaction. Even if both parties agree with full disclosure, it’s rarely worth the hassle. Second, recommending factories is outside our expertise. Even though we have done deals with hundreds of factories in China, there are exponentially more that we haven’t even heard about. Why would we? We’re lawyers, not sourcing agents.That said, we are always happy to recommend to our clients sourcing agents with whom we have worked and respect.

But China factories? Nope.

China employment law guide
Buy this book. NOW.

A truly excellent article on Linkedin by Gordon Orr, entitled, Why Boards Should Worry About China. Guess what? Companies too small to have a board should worry too.

Orr starts his article by noting how many companies “need to be spending more and more time addressing China-related topics. And not just on the business strategy questions, but also on a much broader set of issues.” He then talks about how internal audit teams “spend a disproportionate share of their time on China, checking for compliance both to global and China specific standards.”   Of course, companies doing business in China must comply with “all the standard global compliance challenges – know your customer, modern slavery act, foreign corrupt practices act, and more.” That almost goes without saying. But in China it is “just harder than in many places to ensure that the minimum bar is reached, not just once a year but on a day in, day out basis. The global reputational challenges of being caught in a failure to comply are often larger than the legal ramifications.”

The article points out that getting your employees to sign something saying that they will comply with the company’s code of conduct on such things as kickbacks and conflicts of interest and discrimination and harassment. The company must also engage in sufficient effort to ensure that its China “employees understand what these policies require, that they are being enforced, and appropriate sanctions are applied.” See China Compliance: Don’t Rely on Your China Staff.

Here then is what I see as the money quote from Orr’s article:
As a rule of thumb, I would suggest to any board with material operations in China that if you have not fired someone in the last 12 months for taking kickbacks or committing expense fraud you really have not been looking.
I read this line to a number of the China lawyers in my firm and their common response was “just one?” I know that as lawyers we tend to see the underbelly of companies doing business in China, but I also know that we deal with a steady stream of matters for U.S. and European companies that are losing money in China because one (or usually more) of their employees is stealing from them in China. Recently — and I am not entirely sure why, we are seeing a lot more cases involving someone from the home office in the United States or in Europe (for us that is mostly Spain, Germany or the United Kingdom) on the take from some supplier or some other company in China. And here’s the thing: nine out of ten times it should have been fairly obvious what was going on, but nobody wanted to be the one to raise a stink about it. Nobody wanted to be the accuser.

Orr then talks about China’s “own growing set of laws and policies” that need compliance planning and reviews and audits:

In 2017 new cybersecurity laws have been a central focus. Companies need to understand the scale and nature of the data they create in China and ensure this data is only transferred across borders (even just to back it up) if it falls into categories where this is allowed.

Also, when buying consumer data from third parties, are you sure about how it was acquired and that consumers gave their consent?  More basically, protecting your own corporate data from hacks and from employees walking out the door with it needs extra attention as global IT security tools may not be permitted in China.

Compliance with increasingly burdensome employment and compensation laws is also a major issue.  Getting employee pay and tax benefits correct from city to city is so complex that it is being outsourced by more and more companies. Remitting capital out of China is a process fraught with opportunities for missteps, steps that at times could be omitted but today must all be followed.

Employer-employee problems are a massive growth area for our law firm and within that category, employer audits easily comes in first. Our lead China employment lawyer has so many stories to tell about China’s increasingly complex employment laws she could write a book about it. Which is my not-so-subtle way of setting up a mention that she just did and it went live on Amazon only yesterday. I cannot urge you enough to buy this book (heck, it’s only USD$2.99!) if you have any employees or independent contractors in China, or even if you are just thinking of getting some.

Orr then talks of the compliance problems inherent when you “partner” with a Chinese enterprise and advices being “hesitant to be the first to become a partner to a Chinese enterprise, otherwise the burden of ‘educating’ your partner on the necessity of compliance with policies they may simply believe are irrelevant will all fall on you. This won’t be something you can fix after the deal is struck; ensure that the issue is addressed in upfront negotiations so that at least some basic expectations have been set.” This is some seriously great advice!

Orr then ends his piece with the following three questions salient for any foreign company doing business in or with China today:

  1. Global competition from China. When, how and where will Chinese competitors become, if they are not already, effective global competition? What is our strategy to pre-empt and mitigate?
  2. Preparedness for discontinuity. What would happen if there was a major economic discontinuity in China, arising from global geopolitics, a shock to the domestic financial system, a natural disaster or other? Do we have a play book worked through?
  3. Should we be performing better in China today? Is the shortfall to expectations due to external factors? Or is it our own team?

Does your company have answers?

China Due DiligenceLast week the news broke that Dalian Wanda, the powerful Chinese real estate developer and entertainment company, was selling off its half-built movie studio, a massive complex under construction near Qingdao.

It was the latest in a string of bad news days for Wanda, most of which have been precipitated by the Chinese government’s increasingly strict controls on outbound investment. Wanda’s $1B purchase of Dick Clark Productions fell through in March of this year. The chairman/CEO and the head of China operations of Legendary Entertainment, the film production company that Wanda bought in 2016 for $3.5B, both left this year and have yet to be replaced. Legendary’s recent films (with the exception of Kong: Skull Island) have tanked everywhere but China. Wanda quietly withdrew its attempt to fold Legendary into its existing film operations and list the reformulated company on a Chinese stock exchange. Wanda announced an ignominious sale of its theme parks less than a year after announcing Wanda was going to clean Disney’s clock.

And looming over it all, the Chinese government has made it clear – in increasingly public fashion – that Wanda’s ability to borrow money will be highly constrained.

Both Legendary and Wanda’s subsidiary AMC Theaters issued public statements in the past week that they were not dependent on Wanda for funding; the Western markets were not impressed.

No doubt many people in Hollywood are engaging in a bit of schadenfreude right now. Wang Jianlin, the founder and chairman of Wanda, is a bit like the LaVar Ball of Chinese entertainment (albeit with $30 billion more to his name). He was brash, but plenty of people wanted to do a deal with him when he had assets to burn and was talking about taking a stake in every major studio. Now they’re not sure what to think.

I don’t feel any joy at Wanda’s apparent retreat from the movie business, if that is in fact what’s happening. Yes, they’ve had substantial setbacks and remain highly leveraged, but Wanda is still a huge company and a major player in real estate development, which has always been its core business. It controls more movie screens than any other company in the world, and it still has a sizable film production division. Wang is a shrewd businessman and not to be underestimated. You don’t get to be the richest man in China without having a lot on the ball. Everyone thought he had overpaid for AMC Cinemas but the company has more than doubled in value since he bought it.

But Wanda’s proposed studio in Qingdao never made much sense to me. I lived in Qingdao, and it is a wonderful city. But it has scant connection with the Chinese film industry, and little to recommend it as the site of the world’s largest studio. Wanda promised moviemaking on a grand scale, including enormous soundstages, multiple backlots, and a 40% subsidy for anyone making a movie there. But the reality on the ground never seemed to match the rhetoric, and few (if any) filmmakers not associated with Wanda or Legendary have filmed there.

What was the reality on the ground in Qingdao, anyway? My colleague Steve Dickinson (who spent nearly a decade in Qingdao) and I could never figure it out. The studio complex is almost an hour’s drive south of the city proper, with nothing of note in between but for a few factories. When we visited the site a few years ago, you would never have known that a huge film studio was being built. It just seemed like a pure real estate play: swarms of agents descended on anyone who got close, thrusting brochures for as-yet unbuilt apartment towers. Tour buses stopped by regularly and disgorged passengers who had no knowledge of, or interest in, the studio. And this was well after the glitzy announcement with Nicole Kidman, Leonardo DiCaprio, and John Travolta in Qingdao.

The Qingdao studio complex is now being sold to Sunac, another Chinese developer. Will the studio be completed by Sunac? Was it ever going to be completed? Who knows? Wanda certainly had the money to build it, and Wang loves movies. The ultrawealthy have a long history of bankrolling films, from Howard Hughes up to Megan Ellison. Perhaps this is just a strategic retrenchment. Wanda’s strategy with the Qingdao studio complex wasn’t much different from that of many Hollywood players: if you can’t sell the steak, sell the sizzle.

The recent headlines characterize Wanda’s troubles as if they were the result of poor business judgment. I don’t think that’s fair. This story isn’t about Wanda. It’s really a story about China’s reluctance to let foreign entertainment companies compete in a free market. Just look at what’s happening in Chinese movie theaters right now. A foreign movie blackout is in place, and the screens are being inundated with The Founding of an Army, directed by Hong Kong legend Andrew Lau (Infernal Affairs, which Martin Scorsese remade as The Departed) and starring a cavalcade of Chinese stars both young and old. If history is any guide, The Founding of an Army is guaranteed to do big business at the China box office, regardless of how many people actually see it. For the previous two movies in this series (The Founding of a Nation and The Founding of a Party), state-owned enterprises bought vast blocks of tickets for their employees.

One takeaway from all of this is that foreign entertainment companies (and even just foreign companies in general) need to be more careful than ever when dealing with Chinese counterparties. If the Chinese government interferes directly there’s little you can do, but up to that point you can do a lot to protect yourself. Just look at all the lawsuits being filed in Los Angeles against Chinese production companies – lawsuits which may be doomed to failure, because even if the plaintiff wins, the judgment won’t be enforceable in China.

Conduct due diligence. Make sure your contracts are written in Chinese and enforceable under Chinese law. Get an upfront payment so you can be sure the Chinese side can actually pay under the contract. And if something sounds too good to be true (like the 40% subsidy for filming in Qingdao), it probably is.

China scamsFor decades, Western companies have been making massive financial mistakes in their efforts to do business in China or with China. But as Chinese companies and Chinese individuals go outward from China, we see them making the same mistakes in much much greater numbers, at least percentage-wise. Chinese companies far too often eschew using attorneys or other qualified advisors and they are paying the price for this.

Just a few examples:

  1. Chinese company came to my law firm looking for legal representation to buy a $10 million commercial building. We quoted them a fee to conduct due diligence on the building and they found it too high and went forward with the deal with no due diligence. Turns out the property they bought was in need of a massive environmental clean-up and this Chinese company ended up having to pay around $5 million to accomplish this. Whenever I tell this story I say that any first year associate would have quickly discovered the environmental problem, guaranteed.
  2. Chinese company bought a retail property sight unseen in Spain and then discovered it had grossly overpaid for it because its access was terrible. Again, anyone who had looked at the property maps would have seen this, but this Chinese company chose not to pay anyone to do so, because it would “cost too much.”
  3. An American company in the middle of a bet the company lawsuit sold itself to a Chinese company as though no lawsuit were pending. The Chinese company did this deal with no lawyer (using the seller’s lawyer to document the entire transaction) and it ended up losing the lawsuit (which lawsuit the Chinese company didn’t learn about until after the deal closed) and had to shut down because of it. The seller — not a client and not someone with whom I will ever do business — told me that doing this deal “was like taking candy from a baby” and he has since become “a consultant to ‘troubled’ American companies that want to sell themselves to Chinese companies.” His pitch is based on how easy it is to find Chinese companies that won’t dig deep enough to see all of your company’s warts and so if you are a failing US business you can make a lot more selling to a Chinese company than to an American one becuase the Chinese company will probably never know about your problems. I assume this guy then works with lawyers who draft contracts that absolve the selling company of subsequent problems and the Chinese buyers do not realize what they are signing. Good lawyers do not allow their clients to sign such documents.
  4. Investment fraud. Fake United States or British “investment banks” that take in money from Chinese investors and then completely rip them off. This is a big one and it is growing. Fast. I get emails on these all the time, from both Chinese who have lost a ton of money with these fake investment banks and from readers and friends (most of whom live in China) who have been asking us to write about these scams. The following is the latest such email:
__________ Capital is the outfit supposedly from Washington DC.
This is a supposedly American company selling fake Credit/Debt Obligation swaps and REITs for fake USA properties to gullible Chinese. The numbers are staggering. Seriously staggering. Like Billion of dollars. Someone in my office got bilked BIG time.
After some research, I found out it’s a sloppy but effective MLM Ponzi scheme. The operators are Australian, Chinese, Taiwanese. The offices they list on their website are all empty around the world.
The people are so blatant, that as soon as it is clearly obvious to the suckers that they’ve been had, the operators start a new one with more promises of big riches and a complicated website with lots of BS, and China being so big, they attract a whole new set of suckers.
Ever hear of anything like this ? I mean besides Wall St, lol. Any idea if there are any watchdog agencies that can or would do anything about it ? This poor person in my office lost her entire life savings.
It really makes clear why China has resisted Western Financial services. Just because they are greedy and stupid doesn’t mean they should be robbed. I mean seriously….
I checked out the website/company to which this person refers and I am 99.99% certain it is a scam, but still do not want to list it here for fear of getting sued for doing so. The website reeks of stability, bragging about its many years in business, the sophistication of its investments and the huge amount of money it has under management. The photos are of nice looking distinguished white people sitting around nice offices. It mentions a few people in the leadership (all with the ultimate in waspy sounding names) and the prestigious colleges and universities they attended, along with the well-known companies for which they previously worked. But no years are mentioned and every search I did of this company and of its “leaders” only left me more convinced that it is a scam.
I guess the point of this post is that if you are going to spend or invest your money internationally, you must recognize the risks and do and SPEND what you can to mitigate them and if you are not going to do that, you really should stay at home. Just as we are always preaching to Westerners that due diligence when doing business with China is not optional, we are preaching to the Chinese that when doing business in the West, due diligence is also mandatory.
Would love to hear what you are hearing out there about Chinese companies and individuals getting cheated in the West. What are you seeing out there?
China patents and China copyrights
  Who owns your China IP? Get it in writing.

Conceptually, the basis of the “work made for hire” (often shortened to “work for hire”) doctrine is clear: employers should own (some) rights to work created by their employees, whether such work is protectable by copyright, patent, or some other IP right.

But legally, it’s as clear as mud. The “work for hire” doctrine actually only applies to copyrights. Patents are covered by the “hired to invent” and “shop rights” doctrines in the US, and by the “invention for hire” doctrine in China. And though the patent doctrines have some similarity with the respective copyright doctrines, they are not the same. Not even close.

Legal scholars have explored in some detail why copyrights and patents for employee-created work are treated differently in the U.S. (see here and here), and make the credible argument that a uniform doctrine should apply to both forms of IP. I am unaware of similar scholarship explaining why copyrights and patents are treated differently in China, but note that modern Chinese IP law is based on Western models, and was largely adopted as part of China’s (relatively) recent accession to the WTO. Suffice it to say, the default rules regarding copyrights and patents for employee-created work are different under both Chinese and U.S. law, and employers need to understand those differences or be caught unawares when it comes time to enforce their IP rights.

As I explained a couple months ago in this space, Chinese copyright law is quite employee-friendly.

Per Article 16 of the Copyright Law and Article 13 of the Regulations for the Protection of Computer Software, the default rule in China is that an employee will own the copyright to anything they create during the course of employment, except for (1) “drawings of engineering designs and product designs, maps, computer software and other works which are created in the course of employment mainly with the material and technical resources” of the employer and (2) computer software developed at the employer’s direction or as an inevitable consequence of the employee’s job description. For all other works, the employee will own the copyright; the employer has a two-year exclusive license to use the copyrighted material, and thereafter a non-exclusive license.

If an employer (say, a WFOE) wants a different rule to apply to its employees’ creations, it needs specific language in a signed contract with the employee that assigns all rights in any “work for hire” to the employer. Such contract should be in Chinese and governed by Chinese law, and signed at the beginning of employment.

Chinese patent law, by contrast, is rather employer-friendly.

Per Article 6 of the Patent Law and Rule 12 of the Implementing Rules of the Patent Law, the default rule in China is that an employer will own the patent rights to any invention for hire, which includes any invention created: (1) within the scope of employment, (2) outside the scope of employment but nonetheless assigned by the employer as a task, (3) within one year after the end of employment and satisfying either of the two previous conditions, or (4) mainly by using the employer’s resources. In other words, pretty much everything.

Employers do not need to sign a specific agreement with employees to own the patent rights to such inventions; nonetheless, it is always a good idea to do so, to avoid any confusion. If you’re an employer, the last thing you want is an argument with your employees about whether their creation is an invention protected by patent (and therefore your property) or a creative work protected by copyright (and therefore their property).

The bottom line is that all employers in China involved in creative work should enter into a comprehensive IP ownership agreement with each employee at the beginning of employment. The agreement should be in Chinese and governed by Chinese law, and should unequivocally establish the employer’s ownership of any works created by the employee, whether governed by copyright, patent, or otherwise. Putting all this in writing will protect the employer’s rights, and just as importantly, it will make those rights clear to both sides. A well-drafted agreement can stop a dispute before it even arises.

China lawyersIn my first post on payments from China, I discussed the risk that payments from China will not be made due to failure to obtain approval from the transmitting bank or from the Chinese government. In this and my next post, I will discuss the general ways to mitigate those risks. In this post I will discuss the basic principles. In my follow up post, I will give specific examples keyed to the four basic types of transactions I outlined in the first post.

The basic rules for dealing with payments from Chinese entities are as follows:

Rule Number One: Always put the the burden of dealing with Chinese banks and government authorities on the Chinese side. And always put the burden of a successful resolution on the Chinese side. China is the rare country where its resident businesses will try to shift the burdens of its own governmental actions onto a foreign party. This is not acceptable. A country resident must be liable for the actions of its own government, since the country resident is the only party to the transaction with any real chance to influence the actions of its local government and banking institutions. Think about this for a minute: are you or your Chinese counter-party more likely to be able to persuade a Chinese bank and/or Chinese government official to get money out of China? If your Chinese counter-party is trying to put this burden on you, this is a red flag and a good indicator it knows it likely will never get the money out.

In the area of payments, this means two things:

First, the Chinese side must take on the burden of paying China taxes and fees. That is, all payments to you on the foreign side must be net payments, free of the imposition of taxes and fees on the Chinese side. If a tax is or fee is imposed by the Chinese bank or local tax authority, the Chinese side must pay this tax/fee, with the payment to the foreign side being unaffected. If the payment to the foreign side is $5 million, the foreign side must be paid $5 million. It makes no difference to the foreign side whether the tax/fee imposed in China is zero, 10% or 100%; the foreign side still receives its $5 million payment.

The reason for this is obvious. First, the Chinese side must be motivated to have the tax or fee reduced. If the tax or fee is simply passed on to the foreign entity, no such incentive exists. Second, there is little consistency in the taxes and fees imposed by Chinese foreign exchange banks. The same transaction my be treated differently from region to region and from bank to bank. Even within the same region and the same bank, treatment may change from transfer to transfer. This means it is difficult to predict the amount of any tax or fee that may be imposed. The Chinese side must take the risk of this uncertainty; it is unreasonable to impose the risk on the foreign party.

Second, the Chinese side must take on the risk that payment will be approved within strict timelines. These timelines should be tight. The Chinese side should not be given 30 days to pay. Ten days should be the maximum and five days is better. The reason for imposing a tight deadline for payment is that it is critical you determine as early as possible whether the Chinese side will be able to make payment. Due to the capricious nature of Chinese banks and taxing authorities (especially in the last year or so with China’s increasingly tight capital controls), approval has to be determined for every payment. You should do no work nor take on any risk until after receipt of the applicable payment from China is confirmed, and I mean really confirmed.

Your contract should provide that if payment from your Chinese counter-party is delayed for any reason — including for lack of approval by the Chinese bank or government authorities — you have the right to terminate the underlying transaction. Chinese parties will often argue that failure to pay due to bank or government lack of approval should be treated as a force majeure event that excuses the Chinese side from enforcement. That is, the Chinese side will argue that the foreign party is not permitted to terminate and even call for a force majeure provision in the contract making this explicit.

This provision might then mean you are required to perform under the contract even though no payment is made by the Chinese side. This is not, of course, what the standard doctrine of force majeure provides. However, the Chinese side will often seek to insert this absurd provision. As clever negotiators, they will insert this in an otherwise standard force majeure clause. Since this type of clause is treated as “boilerplate,” the language is often not read carefully, leading to very unpleasant results for the foreign party. For this reason, I routinely refuse to allow any form of force majeure clause to be included in any contract I draft for China. We also have more than once been contacted by foreigners whose contract says one thing for force majeure in China and something very different in English, but the Chinese controls. Do not let these sort of things happen to you!

Rule Number Two: Force early payment. It is important to test as early as possible whether the Chinese side actually has the ability to make a payment. The test is made by providing for an early payment from the Chinese side in an amount large enough to force the Chinese side to go through the full approval procedure with the Chinese bank and with government authorities. A small, token payment is not sufficient.

One purpose of the initial payment is to ensure your written documentation related to the transaction is acceptable to the foreign exchange bank. For example, for any payment that can be classified as a royalty, a number of issues can arise concerning the documents, including the following:

  • The bank may require the underlying agreement be registered with the applicable government regulatory body. This is common for technology transfer and licensing agreements.
  • The bank may require the transaction itself be approved by Chinese government authorities. This is standard for outbound investments. Approval is also normally required for licensing in the publishing and audio-visual fields.
  • The bank may impose various requirements on the written contracts. Typically the bank will require the main agreement be written in Chinese. Many banks also will require an written, signed invoice for each separate installment payment.
  • The bank may work with the local tax office to impose various taxes and charges on the payments. Both the amount of tax and the processing of tax payment can be confusing and can cause delay.

By requiring an initial payment from the Chinese side, the parties can isolate the problems and correct them before the foreign side begins work or takes risks by relying on the ability of the Chinese side to actually make payment. Our China lawyers are constantly getting called by American and European companies that have not received payment under their contracts with a Chinese entity and in many of those instances it is because their contract has not been drafted in a way that will permit payments to leave China.

Your receiving the first payment is NOT sufficient to pass the test. You as the recipient must also check that payment for the following three things:

— First, was the payment actually made by the Chinese side from China (not Hong Kong), or was it made by another entity, perhaps located outside of China?

— Second, was the payment made through a standard Chinese foreign exchange bank, or was it made through some irregular payment mechanism such as a credit card or through a U.S. financial institution or by bitcoin?

— Third, was the payment made in a single lump sum, or is the payment an aggregate of a number of separate transfers?

All of the above are common and these sorts of irregularities show the Chinese side did not obtain China-side approval for payment. This means the Chinese side failed the test. You now know you are facing significant risk for the later, more substantial payments, unless, of course, the Chinese side for whatever reason will be able to sustain its irregular payment methods beyond its first payment, which is rarely the case.

Rule Number Three: Never get behind on getting your payments. Always get paid first. Get paid before you manufacture and ship your product. Get paid before you start the service work. Get your royalty payment at the beginning of the year, not the end. For the sale of your business (or shares in your business) and the sale of real estate, use a tight closing date with a substantial pre-closing escrow deposit.

In some cases, it is not possible to get all payments in advance. In such cases, you should limit your risk should to loss of profit and avoid getting hit with the loss of your out of pocket costs. For example, in the sale of expensive and highly customized equipment, your should set your risk of non-payment by ensuring the initial installment from China will cover all of your manufacturing cost. The risk for the final payment is then limited to your potential profits, and not to your out of pocket costs in material and labor.

A similar approach should be taken in other fields. For example, license payments may be split into a beginning of year fixed payment, with a variable payment based on sales or earnings paid at the end of the year. This approach ensures you will receive at least some payment that can cover your costs and give you a basic level of profit. It is never advisable to depend substantially on a final payment from a Chinese company; it is almost always better to agree to a smaller, secure fee than to seek a higher fee that shifts the payment risk away from the Chinese side.

The critical point is to recognize there is always payment risk when dealing with payments from Chinese companies. To succeed in selling to Chinese entities, you must recognize the risks and mitigate against those risks as I describe above. In my next post, I will describe some of the strategies our Chinese lawyers recommend for specific types of transactions where payments will be received from a Chinese entity.

UPDATE: And do not for a second believe that even China’s biggest and best-known companies are immune from payment problems. Today’s papers are proof this is not so. See today’s big China story: China cracks down on Dalian Wanda’s overseas deals.