Archives: Legal News

China trademarks and design patentsOkay, so that’s two, but you get the point.

Way back in 2011, I wrote a blog post entitled, China: Do Just One Thing. Trademarks. As you can guess from the title, the point of that post was to emphasize that no matter what else a foreign company does when doing business in or with China, it must, must, must file to secure China trademarks for its trade names and logos, because if it does not, someone else will and then the foreign company will not be able to use its trade names or logos in China, even if all it is doing is having its products made in China for export.

In talking with foreign companies looking to do business in or with China, I talk about how NNN Agreements can help prevent their China counter-party from competing with them, contacting their clients/customers, and duplicating their products. And if they are going to be manufacturing in China, I tell them about the importance of Product Development Agreements for protecting their intellectual property before their product is fully developed, and Manufacturing Agreements for protecting their intellectual property after their product is developed and for ensuring quality and timely deliveries.

These agreements are all very important and in some cases, not having one can be fatal to a company. But with the exception of an NNN Agreement, they are relatively expensive and in some cases — rightly or wrongly (almost always wrongly), we get foreign companies who believe that their Chinese counter-party can be fully trusted and such agreements are just not worth it to them. I have better things to do than to argue with such an analysis and so I don’t.

But when it comes to the need to have a trademark, I always fight back because I and the other China lawyers at my firm have seen far too many companies go under after having lost their trademark to China and having their goods seized at China customs for violating someone else’s trademark and then not being able to switch their manufacturing to some country other than China. When it comes to the need to secure the appropriate trademarks in China, I am blunt: anyone who doesn’t do it is making a big mistake:

I tell them how if they do nothing else, they should immediately register their trademarks in China. This one usually surprises them and they often think I have misunderstood what they are planning for China. They at first do not understand why I am emphasizing the need for their filing a trademark in China when they have no plans to sell their product in China. I then explain how China is a first to file country, which means that, with very few exceptions, whoever files for a particular trademark in a particular category gets it. So if the name of your company is XYZ and you make shoes and you have been manufacturing your shoes in China for the last three years and someone registers the “XYZ” trademark for shoes, that company gets the trademark. And then, armed with the XYZ  trademark, that company has every right to stop your XYZ shoes from leaving China because they violate that other company’s trademark.

And this happens constantly.

About a year ago, we started seeing the same thing with design patents and in tomorrow’s post I will explain how that works and what you need to do to prevent it.

 

Importer of Record
Don’t get crushed when you import

The US Importer of Record is liable for antidumping and countervailing duties tied to the product being imported. The Importer of Record is the company listed in Block 26 of the U.S. Customs 7501 form. When I told a US Senator this, he responded by saying he “thought the Chinese company was liable for the duties, not the US company.”

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

If AD or CVD rates go up in a subsequent review investigation, the Importer of Record is retroactively liable for the difference, plus interest. Retroactive liability for AD and CVD cases is a particular problem involving goods imported from China, because the U.S. Commerce Department treats China as a non-market economy country. Dumping is generally defined as selling products in the United States below their normal value, which generally means selling a product in the United States below its price in the home market or below its fully allocated cost of production.

Since China is a non-market economy country, Commerce refuses to use actual China prices and costs to determine whether a Chinese company is dumping. It instead uses complicated consumption factors for raw materials and other inputs and surrogate values from five to ten constantly changing countries to calculate the Chinese company’s production costs. All this makes it impossible for the Chinese manufacturer/exporter to know whether it is dumping, never mind the US importer.

In the Mushrooms from China antidumping case, from the time the antidumping order issued in 1999 through numerous subsequent yearly review investigations, many antidumping rates were in the single digits because Commerce used India as the surrogate country. But when Commerce switched from India to Columbia as the surrogate country in 2012, the Antidumping rates went from less than 10% to more than 200%. The Importers of Record were then liable for the difference in the duty rates, plus interest.

How can you as an importer of products from China (or from anywhere else) avoid getting hit with a massive antidumping or countervailing duty fee? Do not become the Importer of Record. The dollars saved by this can be staggering.

In the Wooden Bedroom Furniture from China initial investigation, for example, I represented a U.S. company importing furniture purchased from a Chinese furniture manufacturing company.  At my recommendation, the U.S. importer pushed the Chinese furniture producer to become the importer of record for its own sales to the company.

In the initial investigation, the Chinese furniture company initially received a 16% antidumping rate which for various reasons, eventually hit 216%. My client estimated that the Chinese manufacturer exported $100 million, which created $200 million in retroactive liability for its U.S. importers. The Chinese company then decided not do a second review investigation, creating an additional $200 million in retroactive liability (for a total of $400 million) in retroactive liability for the U.S. importers.

However because my client it was not an importer of record on the sales from the Chinese furniture manufacturer, it never had to pay a penny. This was not true of most of the other U.S. import companies and a number of those went bankrupt.

What if your company is the Importer of Record and your antidumping or countervailing rates go up? U.S. antidumping and countervailing duty laws are remedial, not penal. This means requesting review investigations at the Commerce Department, appealing adverse rulings to the Courts and working with Customs often can substantially reduce or even eliminate any penalties. Chinese exporters also can (and often do) use the Commerce review process to reduce their antidumping and countervailing duty rates so they can export to the US again.

China employment contract

China permits only the following three categories of “dispatched” employees to be hired by a labor dispatch agency:

  1. Temporary employees with a term of no longer than 6 months.
  2. Auxiliary employees who provide supporting services that are not central to the employer’s core business.
  3. Substitute employees who perform tasks in replacement of permanent employees during a period when permanent employees are unable to work due to off-the-job training, vacation, maternity leave, etc.

Both the PRC Labor Contract Law and the PRC Interim Provisions on Labor Dispatch require that a dispatch agency and a dispatched employee enter into a labor contract for a fixed term of no shorter than two years. It should be noted that the labor dispatch agency is for legal purposes treated as the employer in this relationship.

As covered in some of my previous posts, China’s labor law mandates that an employee is entitled to an open-term contract after having executed two consecutive fixed-term labor contracts (unless grounds for termination exists). So a question arises: if a labor dispatch agency has consecutively executed two fixed-term labor contracts with an employee, will the employee be entitled to an open-term contract? In other words, will a dispatched employee be treated the same as a regular employee under this circumstance? Note that China’s labor law clearly states that at the time of renewal or execution of the labor contract, unless the employee requests a fixed-term labor contract, an open-term labor contract must be concluded.

Consider two recent cases in Beijing (I have simplified both a bit for purposes of this post). In the first case, after having executed two consecutive fixed-term contracts, the employee requested an open-term labor contract, however, the labor dispatch agency ultimately refused and served the employee with a termination notice. The labor dispatch agency argued that the law on open-term labor contracts does not equally apply to dispatched employees. The employee sued and the Second Intermediate People’s Court of Beijing ruled against the labor dispatch agency and instead held that China’s law regarding open-term labor contracts does apply to dispatched employees. And then, just as would have been the case had the employee worked for any other company in China, the Court required the dispatch agency pay the employee double the employee’s monthly wage and forced it to enter into an open-term contract with that employee and pay that employee damages for wrongful termination. And here’s the kicker: the company that retained the labor dispatch agency and used the employee was deemed jointly liable for both of those amounts (the wages and the damages), meaning it too was on the hook for payment.

In another case involving a dispatched employee, the Xicheng District People’s Court also concluded that China’s labor law applies with equal force to labor dispatch agencies. This court reasoned that even though the PRC Labor Contract Law states that a labor dispatch agency and a dispatched employee must enter into a labor contract for a fixed term of no less than two years, this provision does not preclude such a labor contract from being a regular labor contract. The court also discussed how since the law treats a labor dispatch agency as an employer for legal purposes, this means the labor dispatch agency is subject to the same responsibilities as an ordinary China employer, including the obligation to execute an open-term contract when conditions for being required to do so have been met. The Court went on to make clear that the general intent of China’s Labor Contract Law is to protect employees, and allowing a labor dispatch agency to be exempt from this requirement on open-term contracts would be contrary to that intent.

Though it is true that Beijing tends to be a pro-employee municipality and the above cases are not necessarily conclusive regarding how similar cases would turn out in other municipalities, this does reinforce the Chinese government’s generally negative view of labor dispatch situations. For how China’s on the ground labor law can vary from city to city, check out China Employment Law: Local and Not So Simple

The bottom line here is the same as the bottom line when doing just about anything regarding China employment law:

  1. Assume the Chinese courts will favor the employee.
  2. Figure out all of the laws and rules, and especially the local rules and cases, before proceeding.
  3. Know that China does not generally like the hiring of workers via third party hiring agencies. It never has and its distaste for such arrangements just keeps growing.
  4. You as the company that retains the third party hiring agency and uses the workers provided by the third party hiring agency can be held liable and hit with damages for the misfeasance of your third party hiring agency. I am tempted to repeat this (but I won’t) simply because there is a widespread belief that using a hiring agency eliminates any legal responsibility for the workers employed. This is just flat out wrong.
  5. If you are going to use workers from a third party hiring agency, you should make sure that you have a good contract with that third party hiring agency and that the third party hiring agency you use has a good contract with those who will be working for you.

 

Internet of Things IoT
Internet of Things = Shenzhen

A little more than a year ago, I did a post, entitled, Shenzhen As China’s Most Competitive City. It Just Might Be…. I wrote that post in response to the Chinese Academy of Social Sciences having just named Shenzhen as “China’s most competitive city.” I talked of how our China lawyers were seeing a shift to Shenzhen among our clients:

Five years ago, my law firm’s clients would nearly always set up their China operations in either Shanghai or Beijing. Beijing if they were in media or entertainment or software and Shanghai if they were in consumer goods or finance or pretty much everything else. Though we would occasionally get strays who would set up in Qingdao or Dalian because they were in the fishing or shipping industry or Xiamen or Xi’an because they liked those cities or knew someone there, or Shenzhen because they knew the city from having gone there so many times to oversee their product manufacturing outsourcing, certainly our bigger and more sophisticated clients were choosing Beijing or Shanghai.

But in the last few years, many of our China WFOE formation clients are requesting we set them up in Shenzhen.

I noted that our clients were giving us the following reasons for choosing Shenzhen:

1. It’s close to Hong Kong but cheaper.

2. It’s become the electronics hardware center for China, and not just for manufacturing, but for design and engineering.

3. It may not be as exciting as Shanghai or Beijing, but it’s the best place for business.

4. It is a nice place with a number of good international schools.

5. It is a lot less expensive than Shanghai or Beijing.

In just the last year since I wrote the above, Shenzhen (despite getting considerably more expensive) has almost taken over our China practice. Not so much with WFOE formations (though those for Shenzhen have increased) but with anything having to do with hardware and with the Internet of Things (IoT). At least half of our new clients in the last year are involved with Shenzhen. Some are seeking to go into Shenzhen via WFOEs, but most are working with the electronics manufacturers there and with them they are looking to manufacture, do joint ventures or technology licensing deals. If we were to subtract out our China media and entertainment work (virtually all of which takes place in Beijing) Shenzhen is without a doubt the most important city for our law practice right now.

As part of that, Steve Dickinson and I will be going to Shenzhen in late September to speak on the legal issues related to hardware and the Internet of Things. We have spoken countless times in Beijing and in Shanghai (and even in Qingdao and Dalian) but until about a year ago, never in Shenzhen, and yet we will be speaking at least twice there in September.

Of course it is not just lawyers who are taking note of Shenzhen’s increasing importance. Renaud Anjoran, on his Quality Inspection Blog, recently did a post entitled Shenzhen, the Best City in China for Manufacturing? Renaud started his post by talking of how views of Shenzhen vis–à–vis (I’m using French here as a nod to Renaud) Hong Kong have so radically changed:

Many Hong Kong people still shriver when they hear “Shenzhen”. It used to be a very poor patch of land along their border with the mainland. Unsurprisingly, Hong Kong people were seen as an easy target for some Shenzhen criminals. But things have changed a lot.

Nowadays, most Shenzhen residents are happy with their lives. When they visit Hong Kong, they wonder how people can survive in such a tiny, cramped environment, where the basic necessities of life are so expensive.

Renaud then writes about how so many tech companies are located in Shenzhen:

Recently a bunch of glowing articles about Shenzhen appeared in the Western press. They tend to focus on the long list of tech companies headquartered in Shenzhen: Huawei and ZTE (telecom equipment, phones…), Tencent (the only other internet company at Alibaba’s scale in China), DJI (drones), OnePlus (mobile phones)…

MakerBot, the famous 3D printing company, was a big advocate of “Made in USA”… until they moved production to Shenzhen!

Renaud then puts forth the following proposition: “Quite simply, the North of Shenzhen might be the best location in China, and even in Asia, for a manufacturer of complex products.”

I will raise Renaud one by saying that for most hardware and for virtually all IoT products, Shenzhen seems to have become just about the ONLY place for manufacturing in China, and, to a large extent, in the world.I cannot even think of even one of our IoT clients not tied in with Shenzhen. It’s possible such a client exists, but every single one that springs to mind is linked to Shenzhen.

As IoT continues to boom, Shenzhen no doubt will as well.

What are you seeing out there?

For more on China and the Internet of Things, check out the following:

 

China Joint Venture
China joint ventures. When in doubt, don’t.

Many of our foreign company clients (usually North American, European or Australian) have their product made in China under a contract manufacturing arrangement with a Chinese manufacturer. At the start of this relationship, the foreign company’s goal is to sell its product in the North American and European markets. But as China continues to get wealthier and more sophisticated, it often happens that a Chinese company approaches the foreign company about selling the foreign company’s product in China to Chinese customers.

When the foreign company investigates the situation, it quickly discovers that selling its product into China will be considerably more complex than initially seems. Since the foreign company does not own the product until after it is shipped outside of China, selling the product within China will necessarily involve a complex process of exporting out of China and then selling back into China. This results in potentially having to pay VAT twice: once on the export and again on the import. As a result of this, foreign buyers of contract manufactured product will often be approached by a Chinese company with elaborate schemes designed to avoid such taxation.

Such schemes should almost always be avoided.

The Chinese company often will try to convince the foreign company to enter into a complex “partnership” or joint venture that will “allow” the foreign company to participate in the product distribution business in China. Entering into such a partnership is virtually always a mistake and the sensible foreign company should not want to have anything to do with this kind of business in China, particularly when tax avoidance and “incentives” for making sales are the major objective. For more on China Joint Ventures, check out the following:

The foreign company should instead insist on operating under the standard distribution model used throughout the world. The foreign company should purchase its product from its Chinese manufacturer, receive that product outside of China (in an export processing zone or when shipped) and then sell that product back into China to a qualified PRC distributor. The distributor can be located in China, or in a PRC export processing zone or in Hong Kong. The foreign company should set up that distribution relationship so that it earns its profit from that initial sale, freeing the foreign company from any concerns with the financial side of the Chinese operation. On the other hand, the foreign company should strictly monitor the operations of the Chinese distributor through a standard distribution agreement.

If the foreign company wishes to support its PRC distributor, it is free to offer incentives. There are many ways to do this, including by a) not charging the Chinese distributer for product that will be used as samples, b) giving the Chinese distributer reduced pricing for a certain number of products, and/or c) providing the Chinese distributer with cash incentive payments for advertising, for seminars and/or to partially or completely cover the cost of government registrations. However, such incentives should be offered to a distributor operating under a standard distribution agreement that allows the foreign company to terminate the agreement if the distributor does not perform (which is common), that allows the foreign company  the absolute right to audit the distributer’s performance, and that allows the foreign company to immediately terminate the Chinese distributor if it engages in irregular conduct such as bribery or kick backs (which is common). One major defect in any kind of partnership/joint venture approach is that it is difficult to hold the Chinese side to a tight performance standard when there is a business ownership relationship. It is like a marriage: easy to get into, but hard to get out of.

Due to the need to export product from China and then import it back into China, the distributor often will establish an entity in Hong Kong to handle these operations. The foreign company can take an ownership interest in the Hong Kong distributor, but the basic rules remain the same: 1) the Hong Kong distributor should be treated as an arms length third party, operating under a standard distribution agreement and 2) the foreign company (the North American or European or Australian company) should earn its profits from sales to the distributor — taking the profits NOW — and not from the very uncertain and tax disadvantaged distribution of profits from the distributor at some unknown inherently uncertain later date. The foreign company should understand that it is a myth that it will be able to exercise more control in a joint venture than via the above sort of distributer relationship. It is very difficult for a foreign company to control a joint venture thousands of miles away and with no right to make a quick and decisive contract termination decision.

It is rare for foreign companies (particularly SMEs) to want to get intensely involved in the business of product distribution in a vast and complex market like the PRC. This is why major multi-nationals often contract with Chinese distributors to do the work. It is virtually unheard of for foreign SMEs that understand the issues to even consider taking on this difficult burden. But inexperienced SMEs and start-up companies seem constantly to get approached with this kind of ill-conceived concept, for obvious reasons.

If you are having your product made in China (or even outside China) and you are approached with a proposal to “joint venture” on selling your product into China, the first thing you should do is apply the following three basic rules that apply to any project concerning China:

  1. If the proposal is complex, don’t do it. You should be able to understand every word of the proposal in a first reading.
  1. If the proposal involves an equity joint venture business, don’t do it. Do not get into any business relationship with an entity in China that you cannot terminate by a simple contract termination notice.
  1. If the proposal is not supported with a detailed set of financial projections, don’t do it. A “business plan” full of fluff and fancy jargon that no one really understands does not count. You need a standard set of financial projections (hard numbers, not jargon) with each assumption clearly spelled out and supported with facts.

Just follow these three rules and you will save yourself time and money in dealing with projects in China.

For more on China joint ventures, check out Joint Venture Jeopardy (WSJ) and Avoiding Mistakes in China Joint Ventures (AmCham) and for more on China distributer relationships and distribution agreements, check out the following:

Antidumping and countervailing dutiesOver the last several years, many US importers have called me after learning that they are facing liability for antidumping and countervailing duties on a number of different products. These duties can be in the millions of dollars, even though the importers simply did not know that the products they were importing were covered by US antidumping and countervailing duty orders. Far too few companies realize that they can be held liable for duties for importing products into the United States.

This post highlights the breadth of products currently subject to antidumping and countervailing duty orders and it thus should serve as a warning to anyone in the United States who imports those products.

If you were an importer of solar rechargers for RV units are you aware that your product is covered by the US antidumping order on solar cells from China? If you were importing curtain walls/the sides of buildings, auto parts, geodesic domes, and lighting equipment, do you know that all of those products were covered by US antidumping and countervailing duty orders against aluminum extrusions?

The US presently has more than 130 antidumping and countervailing duty orders against China and hundreds of additional such orders against imports from other countries. The orders against Chinese products block more than $30 billion in imports and they can stay in place for 5 to 30 years. The orders can also expand to cover downstream products, such as curtain walls, solar cell consumer products, and gardening equipment.

With regards to China, more than 80 of the antidumping and countervailing duty orders are against raw materials, chemicals, metals and various steel products, used in downstream US production. In the Steel area, there are orders against the following Chinese steel products: carbon steel plate, hot rolled carbon steel flat products, circular welded and seamless carbon quality steel pipe, rectangular pipe and tube, circular welded austenitic stainless pressure pipe, steel threaded rod, oil country tubular goods, steel wire strand and wire, high pressure steel cylinders, non-oriented electrical steel, and carbon and certain alloy steel wire rod.

There are ongoing investigations against cold-rolled steel and corrosion resistant/galvanized steel so almost all Chinese steel products from China are blocked by US antidumping and countervailing duty orders.

In addition to steel, other metal products, such as silicomanganese, metallurgical coke, magnesium, silicon metal, and graphite electrodes, which are used in downstream steel production, are also blocked by antidumping orders. Electrolytic Manganese Dioxide used to produce batteries is also covered, which led Panasonic to close its US battery factory and move to China. The Magnesium orders have led to the destruction of the US Magnesium Dye Casting industry and to the movement of light weight auto parts production to Canada.

In addition to steel and metal products, chemicals products, such as sulfanilic acid, polyvinyl alcohol, barium carbonate, potassium permanganate, activated carbon, glycine, isocyanurates/swimming pool chemicals, xanthan gum, citric acid, and calcium hypochlorite, are covered by orders. The antidumping order on sulfanilic acid led to the injury of the US optical brightening industry, which brought its own antidumping case against China.

In addition to raw materials, many household products are covered by antidumping and countervailing duty orders as well, including ironing tables, steel sinks, wood flooring, wooden bedroom furniture, steel shelving, and steel cooking ware. Other consumer products covered are: tires, hand trucks, lawn groomers, steel nails, paper clips, pencils, ribbons, paper products, gift wrap and heavy forged hand tools.

Food products, such as shrimp, honey, crawfish and garlic, are also covered by antidumping orders against China and other countries.

At this point, any product being imported from China is at least somewhat import sensitive and thus is at some risk of being attacked by US trade actions. This means that you as an importer should monitor the products you import for any potential trade sanctions. And if you should be hit with sanctions, know that you can request an antidumping or countervailing duty review investigation to get the rates reduced and with that your own liability for past imports.

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.