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China WFOEMany many years ago, we helped a foreign school “conglomerate” set up a number of schools in China and due to “word of mouth” we have been getting calls and emails regarding China school set-ups ever since.

Many of those communications come from ESL teachers who see a need and want to fill it, but truth be told this is by no means an easy or inexpensive business and so only a tiny percentage of those who kick our tires ever get past that stage.

Because of all the “I want to start a school in China” tire-kickers, we now have a template email to alert them right up front to the difficulties of successfully doing so and I figure that putting it up here could prove useful to at least some of our readers, so here goes:

A School for Children of Foreign Workers is the only type of school that China allows to be 100% foreign controlled and owned. The path for this is sort of school is as follows:

  • Start with extremely strong local government support for the school and an established off-shore education institution.
  • Register a consulting/technology WOFE with USD$500K+ registered capital and the relevant business license.
  • Lease/purchase a facility and fit-out to meet school-level fire and safety regulations.
  • Spend 2+ years working on the provincial education bureau license application process.

Note: This sort of school can hire foreign and local teachers, and all relevant staff needed to run a school.

If you are wanting to run an “English training center” (basically for English tutoring), the path we see foreigners go down is usually the following:

  • Start with local government support for the training center.
  • Lease/purchase relevant commercial space.
  • Register a consulting WOFE with foreigner/foreign company as sole investor, and with a fairly generic business scope (local AIC’s do not like to give scopes that permit education activities).
  • Open the English training center and hope nobody cares to check your business scope carefully. We have heard of centers getting closed within weeks of their opening and we have heard of training centers remaining open for years and years.

Note: With this method, you cannot officially hire teachers, only consultants or other positions relevant to running a consulting company. Work visas for such “consultants” are often held up due to the skepticism of local officials and a typical foreign teacher’s lack of qualifications to be an actual “consultant.”

If you are trying to use this consulting business to run an actual school it won’t last long unless you are seriously protected by local government. Note that if you are doing this with a “Chinese partner,” it will be your partner with this relationship and it is quite common for the Chinese partner to boot out the foreigner once the foreigner is no longer needed. Because the whole enterprise is so sketchy to begin with, you likely will have no recourse once this happens. Note also that government officials in China change and change often and the new officials generally try to wipe this sort of slate clean.

Registering a fairly generic consulting WOFE would be easy but you would be at big risk for being able to maintain it. Registering a consulting WOFE with something educational in the business scope would be very difficult — but we have done this before — and far less risky once registered. Registering an actual school is a long term and very expensive project, but possible if you have the funding and a will to achieve it.

Where do you fit in the above?

China TrademarksOne of the more distinctive aspects of China’s trademark system is its unique interpretation of the Nice Classification system. China divides each Nice class into subclasses, and treats each subclass as a discrete unit. A trademark registration gives the owner rights in the covered subclasses, but virtually no rights in any other subclasses. (For further discussion of this feature, see China Trademarks. Register Them in China not Madrid.)

I was thinking about this the other day when I read about the U.S. trademark dispute between Dr. Pepper Snapple Group, which currently owns the Crush line of beverages, and the Denver Broncos football team, which currently owns the Lombardi Trophy. The Broncos filed an application to use “Orange Crush” on (1) shirts, caps, and sweatshirts (Class 25 goods) and (2) football-related education and entertainment services (Class 41 services). Dr. Pepper was not happy about this, and in a brief filed on May 31 with the USPTO, argued that their various “Crush” marks have such strong common law rights that allowing the Broncos’ application would dilute the Crush brand and cause consumer confusion.

Dr. Pepper Snapple should be grateful that they’re not in China, where their opposition would be dead on arrival. China is not a common law country and does not recognize common law rights to trademarks. The way to get trademark rights in China is to file a trademark application in the classes (and subclasses) that you want covered. The main exception is for well-known trademarks, but it is extremely difficult to prove you have a well-known trademark.

I just checked and right now no one owns the rights to “Orange Crush” in China in any category. The Denver Broncos could file the same applications they filed in the US and Dr. Pepper couldn’t do a thing about it. (The Broncos might face opposition from other rights holders, like the Shanghai trading company that has registered “Crush” in Class 25, but that’s a different matter.) Then again, if some random person files an application tomorrow for “Orange Crush” in Class 41, the Broncos couldn’t do a thing about that either.

If I were advising the Broncos, I would tell them that if they have designs on using “Orange Crush” in China as part of their long-term branding strategy, they should run, not walk to the CTMO and file China trademark applications for “Orange Crush” in a variety of classes. And I would give the same advice to Dr. Pepper regarding “Crush” (and maybe “Orange Crush” as well, if it’s that important to them). It’s no mystery why companies like Starbucks and Disney have started registering their most important trademarks in every single class and subclass in China. After spending years railing against the idiosyncrasies of the Chinese trademark system, these companies are finally using them to their advantage. The only mystery is why more companies aren’t following suit.

But maybe ignoring China is a calculated move by the Broncos and Dr. Pepper, since everyone knows Tang is the orange drink of choice there.

China employment lawI previously wrote how an employer would be required to pay statutory severance to an employee who unilaterally terminated his or her employment contract because of employer abuse. One such ground is the employer’s failure to provide necessary labor protections for employees. For example, China’s Law on the Protection of Women’s Rights and Interests explicitly prohibits sexual harassment against women and the law further provides that female sexual harassment victims may file a complaint with their employer and/or with the authorities. Nonetheless, not all female employees have prevailed in getting the employer to pay.

Let’s take a look at a case from Zhejiang province.

Employee (plaintiff) entered into an employment contract with her employer (defendant) and thus established an employment relationship with the employer in December 2011. In May 2014, the employee found some strange fluid in her mug on her desk and suspected it was semen and reported this to her Employer. The employer contacted the police department and pulled surveillance video. The next day, the plaintiff/employee took the surveillance video and the mug to the local police. That same day, a male company manager who worked in the same department as the suspect asked the employee who had found the mug on her desk not to press charges so that he wouldn’t lose face. The following day, the suspect went to the police and confessed to everything. The police eventually imposed an administratively detained the suspect for three days as punishment, but brought no criminal charges against him.

The following month, the female employee provided notice to her employer of her intention to terminate the employment contract due to the employer’s failure to provide labor protection and labor conditions required under the law. The employee demanded three months’ statutory severance but the employer refused to pay. The employee filed a claim against the employer at the labor arbitration center but she lost. She then filed a lawsuit against the employer in the local court.

The court first acknowledged that the Special Rules on the Labor Protection of Female Employees and other relevant laws and regulations regarding protection of women’s rights require an employer prevent and stop sexual harassment against female employees. But the court then went on to say this does not make employers strictly liable for every illegal act that occurs at the employer’s workplace. The court then ruled that even though the suspect was an employee of the defendant, the suspect committed the illegal act himself and it was his act that directly and proximately caused plaintiff’s emotional stress, which led to her leaving the employment. According to the court, the suspect had acted completely on his own, and the employer had no way of predicting and controlling the suspect’s action. After the employer received the employee’s report, it handled the incident as best as it could by timely contacting the police in a timely and pulling the surveillance video. The court went on to hold that the department manager who asked the female employee to withdraw her complaint about the incident was not representing the employer with that request and thus his actions also did not constitute employer action. Finally, after the police had punished the suspect, the employer terminated him. So there was no factual or legal basis to support the employee’s demand for severance when she unilaterally terminated the employment relationship with the employer. Thus the employee lost at the court level as well.

How would a U.S. court have handled this same case? To get an answer to this, I turned to my friend, Ada Wong, a Seattle-based employment attorney licensed in the states of Washington and California. She surprisingly responded by saying that a Washington State Court would probably have handled the case quite similarly:

In Washington, employers also have a duty to prevent workplace harassment, including sexual harassment. However, employers are not automatically held liable for every employee’s actions. Under federal law, an employer is subject to vicarious liability to employees for an actionable hostile work environment created by a supervisor. It is unclear from the facts of this case whether the suspect/perpetrator would be considered a “supervisor” so as to render the employer strictly liable for that person’s actions. If the perpetrator had held the power to hire, fire, demote, fail to promote, etc., then that person would likely have been considered a supervisor for this purpose.

If the employer had reason to know – “knew or should have known” – that the perpetrator was engaging in this type of behavior or was going to engage in this type of behavior, and still failed to prevent it, then the employer could be held liable for allowing the perpetrator to carry out his actions.

The employer took the correct action by immediately reporting it to the police and starting an investigation by pulling the surveillance video.

In terms of the department manager who requested that the harassed employee withdraw her complaint, it is unclear whether he represented the employer when he made that request. If he did this while at the office during working hours, then plaintiff could argue that she was under the impression that if she did not withdraw her complaint, she could face adverse employment action. Had she reported this to her employer and was terminated or faced adverse employment action, that would have provided her with additional grounds for a lawsuit. The department manager’s telling the plaintiff/employee not to press charges was clearly inappropriate, but it may not give rise to a claim against the employer.

If this matter were heard in a Washington State Court and there had been no evidence of any prior notice of the suspect’s inappropriate behavior, the plaintiff employee likely would not prevail on a sexual harassment claim against her employer for the suspect’s action, especially because the employer took appropriate measures, including contacting the police and terminating the suspect upon learning of the incident. If plaintiff employer could show that the department manager was acting in his supervisory capacity when he made the request for her to withdraw her complaint, then the employer may be deemed liable.

This case is unusual in that the suspect’s action was so bizarre that it is hard to imagine the employer could or should have foreseen it. Still, the Chinese court never even discussed the “notice” element: did the employer have reason to know (or even have an inkling) that the perpetrator would do something like this?

What is also unusual about this case is that the employer chose to spend money fighting this battle in a court and thereby allowing all of this to become public, rather than just paying the employee her three months.

What do you think?


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

But first, everyone calm down and let me explain.

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

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

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

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

But let’s step back and look at what it really means to have a design patent, and I will do that by explaining (in a compilation form) the design patent cases our China attorneys have recently been handling.

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

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

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

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

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

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

But based entirely on our own history with China design patents, I am guessing Apple will prevail in the end.

What’s the best way to nip design patent hijacking? Register your design patent first, before anyone else.

Update: CNBC has come out with an article, entitled, Beijing’s Apple ban isn’t likely to stick, expert says, that does an excellent job in explaining why it’s premature to panic.

China Media and Entertainment LawOur lead China media and entertainment lawyer out of Beijing, Mathew Alderson, was recently interviewed for a VICE Sports story by Joshua Bateman, entitled, The UFC With Chinese Characteristics. The full text of the interview is below, with the publisher’s kind approval.

Alderson: I understand the UFC [Ultimate Fighting Championship] business is to be conducted by a Nevada LLC. The company promotes and produces mixed martial arts events broadcast free-to-air or through subscription services. I understand the company to have a broadcast deal with Fox Sports. The company is reportedly in discussions with Chinese buyers or investors. You are therefore interested in the effect Chinese ownership or investment may have on the management and regulation of the company.

At the outset, it should be appreciated that Chinese ownership of the Nevada LLC (or any other non-PRC company) would not, of itself, bring the company under Chinese regulation. The company would continue to be subject to regulation in the place in which it is established (Nevada and the United States) and the place or places in which it conducts business. The UFC would only become subject to Chinese regulation to the extent it conducts business in China. As a foreign company, the UFC could only promote its events in China with the assistance of a local partner with the necessary permits and licenses. Production of TV programs in China would also require the assistance of such a partner, probably a local co-producer. This is because foreign investment is restricted in the sectors in which UFC operates.

I answer your questions with these introductory remarks in mind.

VICE Sports: Is it possible Chinese regulators would view the UFC as a media company, and that would impact investment opportunities or how the company is regulated in China?

Alderson: Yes, it is possible because the UFC business model involves promoting live events and producing and broadcasting TV programs. These are sectors in which foreign investment is restricted. The impact would depend on whether the UFC established an entity in China and whether that entity is wholly Chinese or partly foreign-invested. A foreign-invested entity would attract greater scrutiny. The impact would be less if the Chinese market were approached by licensing content into China.

VICE Sports: If the UFC were to be acquired or were to accept investment from a Chinese company, would there be political/regulatory pressure in China for the company to alter its management or board structure to have more Chinese representation?

Alderson: Again, it would depend on where the company is operating and where the investment is made. There would be more scope for such pressure if a unit of the company were established in China, whether as a fully Chinese company or as a foreign-invested company. It would be much harder for Chinese owners to exert, or be subject to, this kind of pressure in holdings outside of China; although, if they had the necessary voting rights, Chinese owners could — like any investors — control or at least influence management abroad.

VICE Sports: If current UFC ownership does not sell the company but instead attempts to expand in China going forward, could they do so on their own or would they most likely need to join forces with a Chinese partner?

Alderson: They would need Chinese partners because foreign investment is restricted in the sectors in which they would likely be operating. The most likely business models are joint ventures and co-productions.

China patentOn Tuesday one week ago, the Financial Times’s Beyondbrics blog published a very interesting piece by China First Capital’s Peter Fuhrman on innovation in mainland China as compared to Taiwan. The piece focused on the push-back Fuhrman experienced after an article he co-wrote holding up a Taiwan-based company (Largan Precision) as an example of a high-tech, high-net-profit business of the kind mainland China has yet to produce. The thrust of Fuhrman’s piece — that innovation is something that cannot be simply created overnight by government mandate — is something with which I heartily agree, but some of the things he says about China’s patent system bear further discussion.

First there’s this:

There are specialist patent courts now to enforce China’s domestic patent regime. But, the whole system is still weakly administered. Chinese courts are not fully independent of political influence.

And anyway, even if one does win a patent case and get a judgment against a Chinese infringer, it’s usually all but impossible to collect on any monetary compensation or prevent the loser from starting up again under another name in a different province.

Though it’s generally true that China’s courts (and the courts of many other countries) can be subject to political influence, at least in my experience, in 95%, maybe 99% of cases this will not be an issue for anyone attempting to enforce patent rights in mainland China. If this were truly a common factor, one would expect China court decisions to show a bias against foreign litigants, but studies have failed to find any such bias. Yes, it is possible for low-level patent infringers to simply abscond, avoid paying damages, and set up elsewhere — I would say this is especially an issue for trademark infringement — but this is rarely an issue for the much larger companies that are typically the subject of patent infringement cases. Though it’s difficult to make hard-and-fast judgements about which countries are better at enforcing IP rights, I have not found any major difference between Taiwan and mainland China in this regard. If Taiwan is better, it is not overwhelmingly so.

Then there’s this:

Another troubling component of China’s patent system: it awards so-called “use patents” along with “invention patents”. This allows for a high degree of mischief. A company can seek patent protection for putting someone else’s technology to a different use, or making it in a different way.

There are two ways to view this statement, to both of which I take exception.

The first is that Fuhrman is talking about so-called “new use” patents, that is patents that claim a new, inventive use of a known article. A classic example of this would include using a known lubricating oil to treat a disease. I think most people would agree that discovering such a new use, where it would not have been obvious (Chinese law is stricter in this regard than say, US law), is exactly the kind of innovation patent systems exist to protect and encourage. It is also possible to patent such inventions in Taiwan and (as far as I know) every other country in the world with a functioning patent system. The same is true of new ways to make a known article. Where the new way is inventive/non-obvious and advantageous, why shouldn’t you be able to patent this improvement?

The second is that Fuhrman is talking about so-called Utility Model patents or innovation (as opposed to invention) patents. Though laws vary between countries that grant Utility Model patents, they are typically designed to protect innovations that do not fulfill the requirements for patent protection (e.g., they may be obvious/non-inventive), but which are still new. The rights granted by such Utility Model patents usually are much more narrow, and the monopoly period is shorter, and they are not examined. Though Utility Model patents can be controversial, particularly because they theoretically can lead to someone being able to file something that, on the face of it, could even cover the wheel (and did, in Australia) utility models exist in many countries that have thriving tech industries, including Taiwan. The fact that so-called “paper-tiger” applications have been filed that appear to cover well-known technology, but which are in fact completely unenforceable, hasn’t deterred innovation in countries with Utility Model systems.

Finally there’s this:

It’s axiomatic that countries without a reliable way to protect valuable inventions and proprietary technology will always end up with less of both. Compounding the problem in China, non-compete and non-disclosure agreements are usually unenforceable. Employees and subcontractors pilfer confidential information and start up in business with impunity.

China Law Blog has written at great length about how to craft enforceable non-compete/non-disclosure agreements so as to protect your business and its IP in China, so I’m not going to say much except that in my experience Fuhrman is only correct about such agreements being “usually unenforceable” in as much as people are using agreements that simply aren’t written so as to be enforceable in China. The same is true of issues with employees and subcontractors; it comes down to the contracts you have had them sign and how you’ve decided to work with them and how you’ve gone about your due diligence.

Bottom line: yes, China does have a patent system that you can use to protect your inventions. No, if anything is holding back innovation in mainland China relative to Taiwan, it is probably not mainland China’s patent system.

* The above is a guest post from Gilman Grundy, a Senior IP Specialist for domestic appliances company Kenwood Ltd, which is part of the De’Longhi Group. The views expressed by Gilman are his own.

China employment arbitration
China employment arbitration is usually a losing battle.

Every few weeks one of our China lawyers will get an email from a foreign company (virtually always a WFOE) that is in a dispute with its China employee. They usually are surprised that they are in the dispute because they are of the view that they did nothing wrong. They too often believe that hiring us will involve us spending an hour or two reviewing the facts and the law and then telling them that they did nothing wrong and then make the case go away.

It most emphatically does not work that way. In fact, in almost all instances when we are brought on to help a foreign company involved in an employee dispute, our advice is to reach an agreement with the employee and then memorialize that agreement with a Chinese language settlement agreement that will make sure there will be no future problems with that employee.

I was cc’ed on an email recently that describes how difficult and expensive these cases can be:

I think it important I be upfront on how we view China employment arbitration cases. We view them as typically unwinnable and nearly always not worth the money to fight.

Take your Qingdao matter. For us to sort through all of the factual and legal issues could end up costing you $10,000. And once we sort through all of them, the odds are good that the best we can tell you is that you have some of chance to prevail on a few of them, virtually no chance to prevail on most of them, and absolutely no chance to prevail on some of them. Employers only very seldom win against their China employees, foreign employers even less so. And with the recent downturn in China’s economy, the odds for employers have gotten even worse. And if you did anything wrong in shutting down your office (and the odds are good that you did), your chances will be even lower.

And then there is the cost of preparing for the arbitration and arbitrating.

So what we suggest our clients do in these situations is try to settle these cases, with all employees. And we have never not succeeded in settling such cases, usually for about half of what the employee is originally seeking. Generally, Chinese employees want quick money and want to get on with their lives, believing that they can (and often already have) get another job. The down economy my impact this thinking somewhat, but interestingly enough, past downturns have really not. So if you were to retain us, the first thing we would do is some quick research on the issues. Not anything approaching the $10,000 worth of research necessary to make arguments to an arbitration panel, but just enough to be able to have a really good idea of the employees’ weak points that we can highlight in settlement talks. And then we work to settle and then when we settle we document the settlement in such a way as to ensure that the employees do not return.

We would also want to look into the issues with your other employees at your other locations as well, to try to nip potential problems there in the bud. The earlier you can resolve these sorts of issues with employees the better. We have handled a number of office closings, including in Qingdao, and we like to settle with the employees before the closing even happens, when they have a few more months even to work and are feeling safe. I assume we are too late to do that here with your ________ office, but the sooner we deal with the other employees, the less this all is going to cost you.

If you agree with the above approach, we should talk some more. If you do not, well then you should not retain us. Either way, I wish you the best with this difficult situation.

Negotiating with Chinese companies
Negotiating with a Chinese company? Think Game of Thrones.

If you have been reading the business news on China, two things ought to have jumped out at you. One, Chinese companies are looking to buy technology innovation. And, two, Chinese companies have a very annoying habit of backing out of their deals. For a news piece on the former, I give you this May 31 Wall Street Journal article: China’s Xiaomi to Buy 1,500 Patents From Microsoft, subtitled, “deal reflects smartphone maker’s efforts to acquire the intellectual property it needs to broaden its reach.” For the later, I give you this June 1 Wall Street Journal article: China’s Latest Export: Broken Deals.

For the last year or so, our China lawyers have been seeing the same thing. On both counts.

Let’s talk about innovation first. Can China innovate? That question has been asked countless times in the last ten or so years and this blog and our China attorneys have asked that question many times as well. Some of us have even been on seminar panels discussing that issue. But I have stopped asking that question ever since a friend of mine pointed out to me that it is no longer the salient innovation question to be asking about China. I his view (and mine now), the better question is a slightly broader one. The better question is whether China can secure innovation either by generating its own or by buying it. Truth be told, many in China, including at the highest levels of the government, have given up on China becoming a top-tier innovator and have therefore turned their attention to China becoming a top tier innovation acquirer. Add in the fears of a declining Yuan and you have all you need for a golden age (or period anyway) of China innovation acquisitions. And that is exactly what is happening and exactly what our China team has been seeing. Chinese companies are looking to acquire innovation/technology/IP any way they can, including by licensing, by purchasing (either the technology itself or the entire company) or by joint ventures.

Now let’s talk about why so many of these technology deals do not come to fruition and that naturally will lead us to why negotiating these deals is so incredibly difficult and why we subtitled this post “Buckle Up For Some Seriously Tough Negotiating.” The Chinese government is telling Chinese companies to acquire technologies and Chinese companies badly want to acquire technologies, but this does not mean they are not having a really really difficult time securing those technologies the way a company from, let’s say Spain or Germany, might go about acquiring such technologies.

Here is how our firm did a technology licensing deal for a Spanish company recently. This Spanish company wanted to buy a U.S. company with a cutting edge technology. The Spanish company spoke with the U.S. company and they negotiated a purchase price and generally discussed other key terms.  The Spanish company then did its due diligence on the U.S. company and that due diligence uncovered a few warts and raised a few issues. So the Spanish and the American company sat down again and negotiated on some of the new issues and renegotiated on some of the old issues, and within a week or so the deal was again ready to move forward. The whole process from start to finish took 3-4 months.

Here is what typically happens when we represent an American company seeking to do a technology deal with a Chinese company:

  1. The American company and the Chinese company reach what sounds like a perfectly reasonable deal.
  2. We draft up the perfectly reasonable deal and the Chinese company then completely changes it.
  3. Our American company tells the Chinese company that it cannot do the new deal the Chinese company has just proposed.
  4. The Chinese company comes up with some really bizarre explanation for why the new deal it is proposing is absolutely essential and explains why the deal our client thought it had can never work.
  5. We then spend weeks explaining why the old deal is just fine, while the Chinese company alternately acts like it will do the old deal with just a few small changes or hints very strongly to our client that it should take the new deal or the Chinese company will just walk away.

I could go on and on, but you get the point. The point is that Chinese companies like to draw in American and European companies with what looks like a really good deal and then go back on that deal. Chinese companies negotiate like this because they realize that once an American company commits to a deal, it wants to close the deal. Once five people in an American company have told their fellow employees that “we have a deal with XYZ Chinese company,” those five employees do not want to have to keep negotiating that deal for another 5-6 months or just walk away from it. Chinese companies know all this and they seek to wear down the other side, plain and simple.

Chinese companies will change the deal not just monetarily, but in even bigger ways as well. Have a deal where you don’t turn over anything about your technology unless and until you get a large upfront payment? Prepare for an explanation from the Chinese company weeks into the deal why that is no longer possible. Have a deal where the Chinese company is supposed to get your three year old technology? Prepare for an explanation months into the deal as to why you now need to replace that with your newest technology, and all at the same price. Again, I could go on and on.

So how should an American or a European company handle this sort of negotiating. By remaining firm and resolute. Not kidding. In subsequent posts, we will go into greater depth on how to negotiate with Chinese companies. So stay tuned….



China Employment Law
    Would that it were this simple.

Generally speaking, once an employee has completed his or her probation period, termination requires severance payment. Note also that even when the employer and the employee mutually decide to terminate their employment relationship, a severance payment is usually required if the employer is the one that initiated the conversation about ending the employment relationship.

Under the PRC Labor Contract Law, the amount of severance that must be paid to the employee is based primarily on the employee’s wages and years of employment. The law provides that for each year (which is any period longer than 6 months) the employee has worked for the employer, the employee will be entitled one month’s wages. For any period of employment of less than 6 months, the employee will be entitled to half a month’s wages. So for example, if your employee worked for you for 30 years and 4 months, you must pay 30.5 months of his or her wages as severance payment.

However, as one of my favorite law professors at Beida used to say: in your practice, you will find a general rule on a particular issue and then you will find an exception to the basic rule and then you will find an exception to that exception. One exception to the basic rule above is that if your employee’s monthly wage exceeds 300% of the local average monthly wage, then the latter should be used in calculating his or her severance payment. Here is an additional wrinkle: in this situation, the number of years of service used to calculate statutory severance will be capped at 12 years.

However, this is not the end of the story. For example, things can get even more complicated when you are dealing with an employee who started working for you before the current PRC Labor Contract Law came into effect on January 1, 2008. Suppose you are terminating an employee whose monthly wage during the last 12 months of employment is higher than 300% of the local average monthly wage. Because the Labor Contract Law does not operate retroactively on this, the employee’s years of employment before 2008 will not be subject to the 300%-local-average-monthly-wage cap and thus the employee’s actual monthly wage should be used for those years. The years of employment after 2008, however, will be subject to the 300% cap.

As is true of nearly everything related to China employment law, the application of what is a relatively clear national law can vary on the local level. For instance, some municipalities apply a 12-month cap under a wider range of circumstances than the national rule. And in Shanghai, if the employee is forced to unilaterally terminate the employment contract due to the employer’s fault (e.g., violence or threats by the employer), the statutory severance will also be subject to a 12-month cap.

At the end of an initial employment term, if an employer does not wish to extend the contract to its employee, it must pay severance. Furthermore, if the employee quits because of employer abuse (e.g., failure to pay the employee wages on time per the employment contract), the employer must pay statutory severance to the employee as well. And don’t forget that the employer is required to withhold any applicable individual income tax on the severance payment.

China employment lawsOur China employment lawyer, Grace Yang has been writing often of late regarding the finer points of China employment law, in large part because Chinese downturn has led to a substantial increase in ill-conceived employee terminations. See e.g., Grace’s relatively recent posts on China Employment Laws and Lifetime EmploymentChina Employee Vacation Law, China Employee Probation, Dealing with Pregnant and Nursing Employees, and China Employee Mass Layoff Laws.

Today, I am going to reveal an email I sent to a potential client, a company that had messed up on many of China’s employment law technicalities in large part because it had simply not realized that the applicable local employment rules were different from the national rules. This company had shut down an office and terminated a number of employees in a number of different China cities, without any regard for how those cities differed with respect to their local employment laws. The below email has been modified so as to make it impossible for anyone to know the company involved.

I think it important that I be upfront on how we view China employment arbitration cases. We view them as nearly unwinnable and, more importantly, almost never worth the money to fight. Your case is no different, especially since it appears that your company’s termination violates local laws.

Take the Qingdao matter. For us to sort through all of the legal issues would likely cost you close to what it will likely cost you to strike a deal with this employee. And once we sort through all of the legal issues, the best we could probably tell you is that you have somewhat of a chance to prevail on a few of them, virtually no chance to prevail on most of them, and absolutely no chance to prevail on some of them. I say this based on having briefly discussed your factual situation with our China employment attorney.

Employers very seldom win against their employees in China employment arbitration, foreign employers even less so. And with the recent downturn in China’s economy, the odds for employers have gotten even worse. And if you did anything wrong in shutting down your Qingdao office (and the odds are good that you did), your chances will be even lower. Even foreign employees (and I see some of those were involved here) nearly always win at these arbitrations.

And then there is the cost of preparing for the arbitration and the cost of arbitrating.

What we do on cases like yours is try to settle, with all employees. Generally, Chinese employees want quick money and want to get on with their lives, believing that they can (and often already have) get another job. The down economy may impact this thinking somewhat, but interestingly enough, past downturns have really not. So if you were to retain us, the first thing we would do is some quick and relatively inexpensive additional research on the issues; just enough to be able to have a really good idea of the employee’s weak points that we can highlight in settlement talks. And then we work to settle and then when we settle we document the settlement in such a way as to ensure that the settling employees never assert any claims against your company again.

We would also want to look into the issues with your other (non-terminated) employees as well, to try to nip potential problems there in the bud. The earlier you can resolve these sorts of issues with employees the better. We have handled a number of office closings, including in Shenzhen, and we like to settle with the employees before the closing even happens, when they have a few more months even to work and are feeling safe.

If you agree with the above approach, we should talk some more. If you do not, well then you should not retain us.

How do you handle your employee arbitrations?