This case is becoming a bit of a cause célèbre in Canada, as “lawyers and politicians lining up behind the couple describe their detention as outrageous, excessive and a gross violation of personal liberty and security.” The couple own Lulu Island Winery, which before the couple’s arrest claimed its exports accounted “for almost 20 per cent of all Canadian wine exported to China.” “The allegations are that ‘a certain brand of ice wine in Canada’ had been declared at around 10 Yuan a bottle (under $2 Cdn), when it was worth many times that amount.”

Many in Canada see this case as a political one and calls are going out to get Prime Minister Justin Trudeau to intervene. One Canadian politician is quoted as saying “the Trudeau Liberals are mishandling the case by treating it as a consular issue, instead of a serious trade dispute.” The Canadian lawyers for the couple have also expressed their dissatisfaction with the Canadian government for not “holding China customs to account.” The lawyers also submitted a briefing paper to the Canadian government that “hints the couple became a target of Chinese wrath because they maintained their innocence” and further stating that “‘many other foreign wineries…were similarly charged but released shortly after admitting to the under–reporting and paying…fines.'”

We used to write fairly often about foreigners getting caught for China customs violations, but we mostly stopped when the number of such cases began to decline. But since Trump’s election as President, we have seen a rapid uptick in China customs problems — at least for U.S. companies. But in terms of how to avoid China customs problems, what we wrote in a 2013 post, entitled, China Customs Problem? Keep Your Mouth Shut! still holds true today:

The point is that no matter how warm and fuzzy you want to get with China customs, it has zero desire to get all warm and fuzzy with you. Their goal is to fine you as much as they can and then maybe just toss you in jail for good measure. Their goal is to make their quotas and you are their quota. If China customs comes gunning for you, seek help and fast. For more on this, please check out and read China’s Detention Of Foreigner For Alleged Customs Violation Should Be A Strong Warning

So what can you do to avoid a major China customs problem? The following is the bare minimum:

  1. Do not underreport or in any other way lie to China customs. China customs is really good at discovering the truth and they — like pretty much everyone else — do not like those who try to dupe them. What always shocks me is not that the companies that come to our China lawyers  after having been caught by China customs were caught by China customs, but their shock at having been caught. If your website says you sell your widgets for USD$1850 and you declare their value with China customs at USD$450, you will get caught. If you have a valid basis for pricing your product differently for China (maybe the product just looks the same as the one on your website, but it isn’t) you may be able to avoid a customs problem. But if you don’t, you are in trouble and saying that everyone else does it or that your Chinese general manager told you to do it is not a defense.
  2. If China customs seems to be coming after you, it almost certainly is coming after you and the odds are good they are thinking about criminally prosecuting you. In other words, if China customs questions something you did, they are likely gathering up evidence to proceed against  you criminally. And at this point, there two things you should do: shut your mouth and get a good lawyer.
  3. And if you did violate China customs laws, it often makes sense not to claim innocence because China goes much easier on those who confess. The article above hints at this But before you admit anything, get a lawyer because there are right and wrong ways to admit to things.

Be careful out there.

International litigation and debt collection
It’s a small world after all.

A German lawyer for a German company owed money — lots of money — wrote me last week to discuss retaining my law firm to try to collect on its debt by seizing U..S and Canada real property believed to be held by its Chinese citizen debtor. This lawyer was coming to me because he had liked my quotes in a Vancouver Sun article from last year, entitled, More Chinese cases target property in B.C., say lawyers.*

The headline of this article is 100% correct, but the increase in lawsuits targeting properties in both the United States and Canada is not due to any change in laws; it’s due to the increase in the number of properties held by Chinese nationals in the United States and in Canada. And these lawsuits involving United States and Canadian courts stem at least in part from the trust so many have in the efficacy of our two legal systems.

At least ten years ago, the Tokyo’s Yomiuri Shimbun interviewed me for an article, entitled, “The Americanization of Law,” [the link no longer exists]. The thesis of that article was that American law and American lawyers influence business laws the world over. Call it Americanization or whatever else you want, but the trend towards an overall liberalization of laws is so common as to be almost inexorable. That article focused on how companies in countries with less developed legal systems so often will engage in legal gyrations to get their cases heard by U.S. judges. That article mostly focused on how Russian and Korean companies were using the U.S. courts to sue other Russian and Korean companies and then seize their assets in the United States. This use of United States and Canada courts has not changed.

Anyway, back to the Vancouver Sun article, which has a somewhat similar thesis:

Lawyers say they are seeing a substantial increase in B.C. court cases filed by Chinese companies seeking to seize real estate assets from Chinese immigrants in B.C.

The Chinese plaintiffs are asking B.C. judges to enforce monetary judgments awarded in Chinese courts. These Chinese rulings typically involve people found in China to have defrauded Chinese banks or business partners and then fled to Canada with the money and invested in real estate here.

The rapid rise in the numbers of Chinese cases in Canada and the U.S. — two preferred destinations, according to the Chinese government, for financial fugitives — has also been recognized by Dan Harris, a Seattle lawyer who advises international law firms on strategies for recovering assets from Chinese defendants.

Such cases have been trickling into B.C. courts for several years, including a 2015 B.C. Supreme Court award of $670 million to the Bank of China against money allegedly laundered through buying multiple homes and setting up bank accounts in Richmond.

But, according to Vancouver lawyer Christine Duhaime, a precedent-setting case in June appears to have opened the flood gates.
Duhaime says that after her client, China Citic Bank, won a so-called Mareva injunction from B.C. Supreme Court, prohibiting the sale of four Vancouver-area homes worth $7.2 million, calls from China poured in. The homes belong to a couple who were alleged to have “fled China” with an unpaid $10-million loan.

Duhaime says she understands this is the first case of a Mareva injunction, also called a freezing order, being won by a Chinese bank in North American courts. Such injunctions prevent assets from being sold before a court can rule on whether they should be used to repay a court award.

Based on the case, Duhaime says she has obtained information from China alleging that “billions of dollars” of bank fraud proceeds are invested in B.C. real estate. She said she could not share the documents for reasons of client privilege.

Many years ago, my law firm represented a former Hong Kong police officer who had left Hong Kong maybe thirty years earlier, under a cloud of suspicion for having engaged in large-scale corruption. The City of Hong Kong had somehow learned that this police officer now owned substantial properties in Washington State and in California and it sued him to get that property.

The litigators at my law firm have litigated a large number of similar cases over the years, mostly involving private, not government, litigants. In many of those cases (most?) the plaintiff has chosen the United States as its venue from a whole host of options, including its home country, simply because it believes the United States courts are most effective in rendering judgments and — even more importantly — having the capability to collect on those judgments by seizing assets. Many years ago, we were retained by an American company to enforce its Chinese judgment against a Chinese company in a California court. Its thinking — which was absolutely correct — was that it had spent years trying to collect against this powerful Chinese company, based in what was for China a small town and it would never succeed there. So we were tasked with turning the Chinese judgment into a United States judgment and then seizing product from the Chinese company as it came into the United States and payments to the Chinese company as they left the United States. These sorts of cases are also becoming more common.

What’s so interesting about the Vancouver Sun article though is how it reveals the pent-up demand for lawsuits by Chinese companies against Chinese citizens with property in British Columbia:

“The (Citic) Mareva case absolutely increased the interest in China, and caused a number of banks in China to reach out to us and say ‘We have all these cases. Can we do something in B.C., too?’” Duhaime said. “There is lots of cases coming down the pipe, and there is lots of appetite in China from the government, down to the banks, to come to B.C. to enforce judgments.”

In the Citic case, the defendant, Shibiao Yan, a citizen of China, is now seeking to overturn the Mareva injunction. Yan argues Mareva is a “harsh and exceptional remedy that should only be available in the clearest of cases,” according to B.C. legal filings. Yan’s lawyers did not respond to a request for comment on the case.

Duhaime says as the Citic case continues, her law firm is already working on new cases.

“One of our next projects is a Toronto house we are looking at, worth $100 million,” Duhaime said. “A guy went to a bank in China, defrauded them, got a loan and all the money in one day, and moved to Canada and got a mansion. And no one asked any questions, even though he never worked a day in Canada. It’s all the same type of story, where a foreign national doesn’t have a job, but is living in homes in Canada and owes money to a bank in China.”

Another Canadian lawyer expects these cases to increase as well:

McGowan said that he could not speak specifically about the case. But he told Postmedia that he anticipates a growing wave of legal actions from Chinese citizens seeking to recover debts by targeting B.C. properties.

“What I can say generally is that I’ve seen and I’m anticipating seeing a lot more claims like this,” McGowan said in an interview. “The amount of inflow litigation from China is substantial. I think the Chinese are starting to appreciate there is an opportunity to make recovery on their losses in China … against people who have immigrated to Canada.”

I then seek to explain the reasons for increased interest in pursuing Chinese-owned assets overseas:

Harris, the Seattle lawyer, said he agrees with the Vancouver lawyers “100 per cent” that cases from China are rapidly increasing.

“There is an influx of these cases because they are in some ways so easy to bring in the U.S. and in Canada,” Harris said. “And, more importantly, they are so easy to collect on, unlike in China, where winning a case is one thing but collecting on the judgment is another.”

Harris said his firm is often approached by Canadian and U.S. lawyers seeking to recover assets from companies and people in China. He advises these lawyers to seek out assets owned by the litigation targets outside China and then take action “in other countries with more effective legal systems for collecting on court judgments or arbitration awards.”

But just to clarify. Suing Chinese individuals and companies in the United States or Canada makes terrific sense if they have assets in the United States or in Canada, but it will probably not make sense if they do not. One more thing you should know, however, is that it is very easy to get a judgment in the United States and then take that judgment to Canada and turn it into a Canadian judgment, and vice-versa. So if you are owed money by a Chinese national or a Chinese company that has assets in both Canada and the United States, you probably will be able to get away with suing in just one of the two countries and using your victory in that one to collect on assets in both.

Isn’t international litigation fun?

 

* It turned out that the Chinese citizen did not own any property in the United States or in Canada — or at least any that the German company’s private investigator could find — which is what allows me to mention this matter here. I also changed the facts a bit as further camouflage.

 

China employee termination rules
China employment law: know the rules

Terminating a China-based employee usually requires good cause. A serious breach of employer rules and regulations can be a basis for an employer’s unilateral termination of an employee, but China employers have other options as well.

A China-based employer may terminate an employment contract if the economic circumstances which formed the basis for the parties’ having signed the employment contract in the first place have changed, causing the employer to be unable to perform under the contract. This sort of termination is permitted only after negotiations between the employer and employee have proven they are unable to reach an agreement on amending the contract. But does this sort of termination really work? As with just about everything related to China employment law that will depend on whether the employer handled the termination 100% correctly and a bit on the locale as well. See China Employment Law: Simple Questions and Complex Answers.

 Let’s look at an actual case out of Zhejiang province. The employer and employee signed an open-term employment contract in 2010 for the employee to work in a managerial position in Hangzhou. During the term of employment, the employer decided it needed to shut down the department this employee managed so as to cut costs. The employer provided its shut-down plan to its labor union for comments. The employer then notified the managerial employee in writing of its decision to close down his department and directed the employee to report to a new position, with pay and performance standards essentially the same as the managerial employee’s existing position. The employer’s notice clearly informed the employee that if he failed to report to his new position within a specified period, the employer would not be able to assign him to a similar position and would instead have to terminate his contract.
The employee refused to cooperate as directed and the employer then prepared a notice to terminate the employee’s contract and it provided notice to the company’s labor union for comments. The notice made clear the basis for the employee’s termination was the employee’s failure to abide by the employer’s new position assignment coupled with the employer’s inability to accommodate this employee with another similar position. These circumstances caused the parties to be unable to perform under the existing employment contract and after negotiations, the parties were unable to reach agreement on amending the original contract. The employer tried to serve the employee with his termination notice in person, but the employee refused to accept it, so the employer sent notice to the employee’s last known contact address by mail. The employer also published the termination notice in the daily newspaper and paid the employee an additional month’s wage as severance based on his years of service.
The employee sued for unlawful termination and demanded reinstatement of his position.

The courts sided with the employer and ruled as follows. After the employer decided to shut down the employee’s department and eliminate the employee’s original position, the employer provided the employee with notice specifying (1) his new position, (2) the new payment standard (which would not reduce his take-home pay one Yuan) and (3) the requirement that he report to his new position or be terminated for failing to cooperate. The employer also repeatedly asked the employee to report to the new position. The court held that the employer had handled the termination correctly and ruled entirely in the employer’s favor.

This case almost certainly would have turned out very differently had this employer not been so punctilious in following all the procedural requirements for a termination due to economic circumstances. This employer did not go full speed ahead and unilaterally terminate the employee right after it made the decision to eliminate his position. It instead got its labor union to sign off on its plan and then it sought to give the employee a similar position with similar pay.

Keep in mind that terminations because of economic circumstances require the employer pay their terminated employees statutory severance. And as always, it is important to check the local requirements before you terminate an employee.

 

US-China Trade WarThe Trump administration just launched two investigations to see if steel and aluminum imports threaten to impair the national security of the United States. Because these investigations were self-initiated by the Trump administration, many believe it pre-ordained that some type of import restrictions will be imposed. But here are a few reasons why imports should not be restricted, from China or from anywhere else.

Past Section 232 determinations indicate steel/ aluminum imports are not a “national security” threat. Only 26 investigations have ever been conducted under Section 232 of the Trade Expansion Act of 1962. Prior Section 232 investigations defined “national security” as covering not only a military or national defense component, but also the general security and welfare of certain industries “critical to the minimum operations of the economy and government.” Most (19 out of 26) resulted in either a finding of no national security threat or no action taken in any way. Only crude oil from Libya and Iran were found to be a national security threat that warranted some type of import restrictions.

The most recent Section 232 investigation concluded in October 2001 and it was also on steel. Even taking into consideration the national security requirements of the post 9/11 campaign against terrorism, the Department of Commerce (DOC) found that imported steel did not threaten to impair U.S. national security. In that report, the DOC found that the entire US military’s steel requirements was less than one percent of the domestic steel industry’s production capacity. DOC concluded (1) that the U.S. was not dependent on imported steel, and (2) that steel imports did not threaten the ability of domestic producers to satisfy any US national security requirements for steel.

Current steel and aluminum data are similar to those considered in the 2001 steel national security investigation. Only 30% of imported steel and aluminum was used in domestic consumption in 2016, showing a lack of dependence on steel and aluminum imports. Even if current US military requirements for steel have doubled from 2001 requirements, this would still be less than one percent of the 88 million tons of steel produced in the United States in 2016. The objective data shows steel and aluminum imports do not pose a threat to national security interests. National security should not be used as a pretense for protectionism.

Import restrictions would harm downstream US manufacturers. Additional tariffs, quotas, or other import restrictions may temporarily create a pocket of artificially higher U.S. market prices for steel and aluminum, particularly when compared to the lower prices in the much larger global market. This may provide a short-term benefit to US steel and aluminum producers who would have substantially less competition after import restrictions are imposed. But downstream US manufacturers who use steel and aluminum to produce cars, air conditioners, washing machines, airplanes, and a host of other industrial and consumer goods will either bear any increased costs and disrupted supply chains, or pass those increased costs down to the ultimate buyer/consumer in the form of higher prices. For every one US manufacturing job saved at a US Steel or Alcoa, sixteen US manufacturing jobs at a Ford, Carrier, Whirlpool, or Boeing, will be put at risk, because their foreign competitors would gain a cost advantage over them because of the import restrictions driving up the U.S. steel and aluminum prices they need to make their cars, air conditioners, washing machines or airplanes. The Trump administration specifically noted that shipbuilding, aircraft and vehicles may also become subject to a national security investigation. But any import restrictions imposed to protect the steel industry would adversely affect these other critical industries that may have to deal with higher steel and aluminum costs. The collateral damage caused by any Section 232 measures could be significant.

How do you distinguish “good” imports from “harmful” imports? Canada is by far the largest source of steel and aluminum imports.  A good number of Canadian producers are affiliates of US steel and aluminum producers. Chinese steel imports ranked 11th out of all 2016 imports and represented less than one percent of U.S. domestic production. The U.S. actually exported more aluminum to China (730,355 tons) than it imported (518,773 tons) in 2016. In the current 232 investigations, the USW has already asked that Canada be excluded from any import restrictions.  “China’s the problem, not Canada or other countries which are following the rules,” said USW President Leo W. Gerard. Presumably Canadian imports are usually considered among the “good” imports. But given the recent trade flare ups with Canada involving softwood lumber, dairy, renegotiating NAFTA, and border adjustment taxes (BAT), it is no longer a given that the Trump administration will give any preferential treatment to Canada.

Import restrictions would not address the real problem of Chinese overcapacity. Any threatened import restrictions would do nothing to reduce the China’s excessive steel and aluminum production capacity. Many of Chinese steel and aluminum mills are inefficient, debt-laden “zombie” state-owned mills that need to be permanently shut down. If China doesn’t cut its production capacity and instead keeps churning out steel and aluminum and selling onto the global market, China’s surplus production will continue driving global prices down. No matter how high the United States tries to build a tariff wall, these U.S. import restrictions will do nothing to address the key cause of global price declines for steel and aluminum.

Import restrictions may trigger retaliation. Section 232 import restrictions have been referred to as the trade “nuclear option“because it is so hard to argue against measures allegedly used to protect a country’s national security interests. If the U.S. invokes “national security” to protect its steel and aluminum industries, other countries will likely claim similar national security interests to protect their own allegedly critical industries from imports. For example, China could claim its soybean industry needs protection from imported soybeans that come primarily from the United States.

Despite the harsh campaign rhetoric during the Trump presidential campaign, Trump as President touted the recently announced “early harvest” deal with China as “gigantic” and “Herculean” and as a reset of US-China trade relations. Though the Section 232 national security investigation would appear to be the perfect forum for Trump to single out Chinese steel and aluminum producers for indiscriminate production expansion, it is now unclear whether Trump will do so lest he jeopardize the budding relationship he has developed with President Xi Jinping. If Trump does go after Chinese steel and aluminum imports based on national security grounds, it seems certain China will retaliate and find some U.S. industry to target with its own counter-actions.

If these Section 232 investigations result in import restrictions on all steel and aluminum imports, or even just on Chinese imports, there is a very real possibility the following lose-lose scenario will ensue:

  • steel/ aluminum prices increase, but not enough for the U.S. steel/aluminum industries to improve enough to recover or add any new jobs;
  • downstream industries that use steel and aluminum get hammered by increased steel and aluminum prices and lose sales to cheaper foreign imports from companies that still have access on the global market to lower priced steel or aluminum;
  • key foreign allies get harmed by restrictions on all US imports;
  • China and other countries impose their own national security import restrictions in retaliation against the United States.

I would much prefer the DOC and President Trump come to recognize this is a weak national security case. Labelling steel or aluminum imports as a national security threat is neither necessary nor supportable by the facts. President Trump could take more moderate actions that may be enough to claim political victory while avoiding retaliation from global trading partners.

China M&A lawyersThe below is an email from one of our China corporate transactional lawyers to a client in the midst of dealing with a Chinese company interested in buying our client. Though it is from quite some time ago, I have modified it slightly to remove anything that might pass as an identifier. I pass it on because it shows a fairly typical issue that comes up when a Chinese company is seeking to buy a company overseas.

The response from the Chinese side is the normal endless negotiation approach. I doubt this is what you want, and your offer to [Chinese company made it clear this is not what you want. If you concede to their approach, your advantage is lost.

This happens often in company sales. It is not unique to China. The response depends on who is most desperate. Here is what we normally do in this situation where we are not desperate.

1. The buyer has two weeks to perform due diligence during the period required to draft an agreement.

2. If the buyer wants to extend due diligence into the period after the definitive agreement is executed, it can have an additional 2 weeks but only if they pay a substantial non-refundable earnest money deposit. “Substantial” means something like USD$ _____million or more. If they want another two weeks, it requires an additional non-refundable deposit. Chinese companies rarely agree to this kind of proposal, but if they truly believe they are onto a “good thing” (and it does appear they believe that here) they will likely pay for your company with no real due diligence at all. So you need to find out where you stand with these people.

To be clear: what the Chinese side is saying is that they don’t know anything about [client company_] and they don’t know whether they want to purchase you at all. Your position should be: [Chinese company] should be hot to purchase you or the whole project is a waste of time.

You have stated you are a terrific market opportunity for [Chinese company] and you are convinced [Chinese company] already understands this. If [Chinese company] does understand then they understand the price you are asking is a bargain and they should just pay it and be done. If they do not just accept this, you probably will need to meet with them face to face, which means key people from [Client company] need to go to China very soon to meet with the [Chinese company] players face to face. In that setting, you should understand that the Chinese company will likely be expecting you to give them a substantial price concession and so whoever travels to China on your behalf should have authority to agree on pricing; the people in China will want to negotiate with a decision maker, not a functionary.

Successful negotiations of company sales with Chinese entities typically work only if the company they are looking to buy both act like and truly do operate from a position of strength. This though means you must be willing to take the risk that [Chinese company] will walk away. The idea of a deal that is fair to both parties is for the most part foreign to Chinese companies. One side has to be on top. You need to be the side that is on top, even if that means [Chinese company] walks away. If you really believe you are giving [Chinese company] a rare market opportunity — and everything seems to align with this view — you have to believe you are “on top” and you do not need to sell to [Chinese company].

If you want, you can confirm immediately that your intent is to sell 100%. However, your offer document says just that. If they cannot read, then that is also a problem.

I note we had a similar situation here in Washington state for the sale of a company to a Spanish buyer. We took a hard line and the buyer walked away. Four months later, they returned and our client was sold at a very good price. The key was that our client did in fact own very valuable IP assets the Spanish company needed, so they came back. And when they came back we were able to say: now you understand we are not going to tolerate a low-ball price or any other nonsense; let’s just do the deal and be done with it. We did the deal in two weeks and we told all the investment banker vultures to get lost. But, the client had to take the risk that the Spanish company would never return. You may end up having to show similar patience here.

China licensing agreementChinese companies are seeking out technology wherever and however they can find it and our China lawyers have been writing a slew of China technology licensing agreements of late. Sometimes these deals come to us as China licensing deals, but other times, they come into our law firm as putative joint ventures, but after our China lawyers explain the difficulties and the costs involved in doing a joint venture our clients seek to restructure their relationship with their Chinese counter-party into a licensing arrangement.

We are big fans of China licensing deals because we have seen them be a financial stimulant for so many companies, including companies with admittedly outdated or “second tier” technology. China licensing deals can be win-win transactions because the Chinese companies and Chinese citizens get perfectly fine technologies (I presume) at a good price and the Western companies get a revenue source from a formerly moribund or nearly moribund technology.

The licensing deals our lawyers have been handling in the last year or so have mostly involved computer or industrial or medical technologies where the Chinese company wants to use the licensed technology to jump-start its own technology development. These Chinese companies initially plan to license the technology from our American or European clients as stepping-stone to building their own cheaper products in China and then later using that technology and the funds they receive from new product sales to further develop and refine (and perhaps even localize) the technology and their own products to compete better with Western companies on the high end. Sometimes though the deals are with a Chinese company that wants to put the technology to immediate use to improve on existing products they sell in China.

The below is a list of initial questions I pulled from an email (modified to eliminate anything that could possibly serve as an identifier to anyone) from one of our China IP lawyers to a client based on the licensing term sheet to which the client and the potential Chinese company licensee had signed off. The email posed some initial questions, the answers to which were necessary to allow this lawyer to being drafting the licensing agreement.

1. Territory:

a. For “China,” does this include Taiwan? Hong Kong?  Macao? These three jurisdictions all have an independent patent/trademark system. We do not use the term “China” in our agreements since it is not clear. We use the term PRC to refer only to Mainland China. Given the PRC’s aspirations, even that term is not perfectly clear. To which of these countries were you referring?

b. The term “Southeast Asia” has no precise meaning. Please identify the specific countries intended to be included. In particular, what is the status of Singapore, Indonesia, Malaysia, and The Philippines?

2. Note with respect to Territory. There are a number of separate issues:

a. Place of manufacture.

b. Place where patents/trademarks must be maintained.

c. Place where sales are permitted.

The three are quite distinct and it will be important we be clear on all three. It seems to me you are proposing the following:

a. Territory of manufacture is the PRC.

b. Territory of patents is PRC, Republic of Korea, Hong Kong and Japan.

c. Territory of sales is PRC, Republic of Korea, Japan, Taiwan, Hong Kong, Macao, Viet Nam, Thailand, Cambodia, Laos, Malaysia, Indonesia, Singapore and The Philippines?

Please advise on whether the above is correct? If yes, this will require some complex drafting. But it is doable.

3. Your statement of the license grant is a typical U.S. grant, which includes the right to sublicense. We though generally advise against giving a Chinese licensee the ability to sublicense. What is you position on this?

4. For a manufacturing license, we prefer to see our clients limit the Chinese side to manufacturing only in China at a manufacturing facility you the licensor have approved in advance. Do you agree with this?

5. This agreement is for two products. How do you want to deal with the trademarks and logos for both of these products? Will the patent license also include the associated trademarks and logos? What is the current status of registration of those marks in the applicable territories? Your controlling the trademark is a powerful way for you to control the right to manufacture and sell the products and if you have not registered your trademarks in the PRC and in the other countries in which they will be sold by your licensee, you should consider such registrations in connection with this project. Let’s discuss this.

7. In your Performance Metrics section, you raise the important issue of the obligation of [Chinese company] to pursue approvals in the appropriate territories and to engage in selling the two products in those territories. Note, however, that this is extremely complex. To list out just some of the issues:

a. What is the obligation of [Chinese company] to apply for and receive approval with respect to each of the countries in which you will be granting it the licenses? What happens if [Chinese company] receives approval in the PRC, but does not even try to secure approval in the other territories. What happens if [Chinese company] receives approval for Korea but not for the PRC? How are you intending for this to all work?

b. Is the stated sales goal just for the PRC or for the entire sales territory? Have you considered separate sales goals for each country?

c. What is the penalty to [Chinese company] if it does not achieve the performance metric. For example, what if they don’t even try for Korea? We could draft it so that you can either terminate the entire license or simply remove Korea from the territory. If the sales goal is cumulative, then you would terminate the entire license. But if the sales goal is by country, then you would remove the country from the license.

d. The same applies to your company. I doubt you mean that you must pursue patents in all of the countries listed. Am I right about this? Either way, we must be clear about this. We could perhaps clarify all this by providing for three territories:

i. Manufacturing territory: PRC.

ii. Patent territory: PRC, Republic of Korea, Hong Kong and Japan.

iii. Sales territory: PRC, Republic of Korea, Japan, Taiwan, Hong Kong, Macao, Viet Nam, Thailand, Cambodia, Laos, Malaysia, India, Indonesia, Singapore and The Philippines.

That said, we need to keep these various territories clearly demarcated.

8. In the performance metrics, you properly make clear that actively pursuing approval for sale is required for the license and you provide a hard deadline for one product. But since there are two products and as many as 15 different countries, this could get impossibly complex. We will need to provide a manageable way to keep track of two separate issues: the approvals to sell and the actual sales, for each product and for each country. There are many ways to do this. The simple way is to set an overall gross sales goal, without any specification of country of sales. If the sales goal is met, that’s the end of it. Then you can provide that if no approval is obtained for a particular region by a particular time for a particular product, you have the right to remove that country from the sales territory for that product. It seems this approach will work best but I would like to hear your thoughts on this.

9. Buy Back Right. It seems the buy back right for manufacture should only apply if [Chinese company] meets all of its obligations under the license. Do you agree?

Please consider the above and provide me with your comments and questions.

 

For more on what goes into a China licensing contract, check out:

China Licensing Agreements: The Extreme Basics.

China Licensing Agreements: Giving Your Technology a New and Profitable Life

China Difficulties, Netflix, and Why We Love Licensing

Nine Tips for China Licensing

China employee terminationWhat happens if a China employer makes an employee termination decision that is later ruled unlawful? According to the Responses to Several Issues Regarding Application of Law in Trial of Labor Disputes recently released by the Beijing High People’s Court and the Beijing Labor Personnel Dispute Arbitration Committee, the answer is specific performance. In other words, if you unlawfully terminate an employee, you must reinstate that employee to his or her previous position in your company. This technically applies only to Beijing but we expect this will become the norm in many other places in China as well.

Under this new law, if the employer’s termination decision is unlawful and the employee demands reinstatement such a demand will ordinarily be granted. If the court discovers reinstatement is not possible, the employee will be instructed to bring a severance claim for the unlawful termination. What circumstances will make specific performance “impossible?” The new law provides the following guidance:

  1. The employer is declared bankrupt, has had its business license revoked, or has been ordered to close down or has decided to dissolve its entity;
  2. The employee has reached mandatory retirement age during the arbitration/litigation process;
  3. The employment contract has expired during the arbitration/litigation process, and the employer is not required by law to enter into an open-term contract with the employee;
  4. The employee’s original position is critical to the employer’s normal business operation and is of an irreplaceable nature (e.g., general manager, finance manager), and the original position has been filled, and the parties cannot agree on a new position;
  5. The employee has started working for another employer;
  6. During the arbitration/litigation process, the employer delivered a notice of reinstatement to the employee and the employee refused to accept such notice;
  7. Other circumstances that demonstrate obvious impossibility of specific performance.

As is true with many (most?) of China’s employment laws, the employer bears the burden of proving facts sufficient to invoke impossibility. Just because the employer found a replacement for the former employee, without more, it will not be sufficient for the employer to argue “specific performance is impossible.”

This new Beijing law is really not so new at all; it is more a clarification of existing law than anything else. Beijing has a longstanding reputation for a pro-employee approach and we have routinely seen cases where employers were ordered to give terminated employees their jobs back. It is important to note that employer’s cannot contract away their employees’ reinstatement rights.

Bottom Line: As a Beijing employer, you should assume reinstatement will be the norm for an unlawful employee termination, which is all the more reason to be sure you handle all of your employee terminations lawfully. As for the rest of China, reinstatement will still largely depend on where and how.

 

China Cybersecurity law
China’s new Cybersecurity Law becomes effective on June 1
China’s new Cybersecurity Law will become effective on June 1, 2017. In addition to focusing on cybersecurity, the law also details how companies are to handle personal information and data. In determining what is allowed and not allowed for handling personal information in China, it is important to examine The Decision on Strengthening Information Protection on Networks (2012), The Guidelines for Personal Information Protection Within Public and Commercial Services Information Systems (2013), and The Provisions on Protecting the Personal Information of Telecommunications and InternetUsers (2013). There are also many industry-specific rules, including such rules for banking and credit information services. China’s new Cybersecurity Law adopts and modifies existing regulations and codifies them.

Under the new Cybersecurity Law, collecting any user’s personal information requires the user’s consent and network operators must keep collected information strictly confidential. Personal information is defined as information that can be used on its own or with other information to determine the identity of a natural person, including the person’s name, date of birth, ID card number, biological identification information (e.g. fingerprints and irises), address, and telephone number. Once such information has been de-identified, it is no longer subject to the requirement for personal information under the law.

According to the new Cybersecurity Law, network operators are subject to the following requirements when collecting and using personal information:

  • Collection and use of personal information must be legal, proper and necessary.
  • Network operators must clearly state the purpose, method, and scope of collection and use, and obtain consent from the person whose personal information is to be collected; personal information irrelevant to the service provided shall not be collected.
  • Network operators shall not disclose, alter, or destroy collected personal information; without the consent of the person from whom the information was gathered, such information shall not be provided to others.
  • In the event of a data breach or a likely data breach, network operators must take remedial actions, promptly inform users, and report to the competent government agencies according to relevant regulations.
  • In case of an illegal or unauthorized collection and use of personal information, a person is entitled to ask a network operator to delete such personal information; when information collected is wrong, an individual can request correction.

Who are the network operators to which the new law will apply? Owners of networks, administrators of networks, and network service providers. Telecom and Internet service providers, clearly, but “network” is broad enough to go well beyond that.

Networks are systems consisting of computers or other data terminal equipment and relevant devices that collect, store, transmit, exchange, and process information according to certain rules and procedures (Article 76 of the new Cybersecurity Law). If you have a couple of computers at home that can share files, and perhaps a printer connected to them, you technically have a network. The law is not likely to go that far, but the generic definitions of network and network operators leave a lot of room for interpretation, which is exactly how the Chinese government wants it.

The new Cybersecurity Law also requires critical information infrastructure operators (CIIOs) store within China personal information and important data gathered and generated within China and conduct annual security risk assessments regarding their data. Though the definition of CIIO is yet to be clarified, we already know China’s yet to be finalized Measures for Security Assessment of Personal Information and Important Data Leaving the Country will likely require foreign companies doing business in China make big changes in how they handle data. The Cyberspace Administration of China (CAC) published a draft of Measures for Security Assessment of Personal Information and Important Data Leaving the Country back in April, raising many concerns for foreign businesses operating in China.

These Measures for Security Assessment would expand the data localization requirement to all network operators. This would mean that pretty much all personal information and important data collected by network operators within the PRC must be stored within China and not leave China, other than for “genuine business need” and after a security assessment. And if you think you may be a network operator, you probably are.

Since the new Cybersecurity Law does not differentiate between internal and external networks, it is broad enough to include any company that owns an internal network. Will your China WFOE be able to transmit employee information back to its overseas headquarters? In China’s Cybersecurity Law and Employee Personal Information, we set out best practices for doing this, but that was written before publication of the Draft Measures. Should the Draft Measures become effective — as expected — our views on data transfers will almost certainly toughen. Foreign companies are already setting up data centers in China so as to be able to keep data local and many of our clients are looking at doing the same.

We have been reluctant to write much about data and privacy protection in China because existing laws are both unclear and in a massive state of flux. But because this is so important and because this reluctance cannot extend to a client who needs to know what it must do now with specific data, we plan to write more often about these topics in the weeks and months ahead.

Please stay tuned.

Editor’s Note: Sara Xia is an experienced lawyer with law degrees from Shanghai University of Finance and Economics and the University of Washington. Sara practiced law in China from 2010 to 2013 and then in 2015 she became licensed to practice law in California and 2016 in Washington. Sara recently joined Harris Bricken to assist our clients with their cyberlaw and corporate matters, mostly while working out of Seattle, Beijing and San Francisco.

China employment lawyersEven routine China employee terminations are usually challenging and pretty much always require preparation and care. Throw in an employee pregnancy and you increase the complexity and the risk exponentially. Our China employment lawyers have in the last few years increasingly had to resolve situations where a pregnant employee seeks to revoke her termination decision (sometimes by demanding reinstatement of her position), no matter how or why her employment contract is terminated — even when the termination was mutual and even when the termination was with cause. And as is true of just about everything having to do with employment law in China, the laws and the rulings on these things will depend on the facts and on where the employer is located.

Suppose the employer and the employee mutually terminated their employment relationship and after the employee’s departure, the employee finds out she is pregnant. The employee goes back to the employer and asks for her old job back. Recent cases seem to suggest that if the mutual termination was done correctly, the parties’ agreement will be deemed enforceable and the employer does not have to take the employee back. By “correctly,” I mean the following:

  • The termination is documented in writing and the employer has preserved good hard copy evidence. Note that emails and social media do not constitute good hard copy evidence.
  • The employer and its former employee executed a proper mutual termination agreement in Chinese. Note that we do all of ours in both Chinese and in English: the Chinese so that it will actually work and the English so that our client fully understands what they are signing.
  • There is nothing to suggest the former employee was coerced or deceived into signing her termination agreement.

Now suppose the employee’s departure was voluntary at first and the employee resignation was handled correctly. That is, the employer has proper documentation showing the employee resigned voluntarily and there was no employer wrongdoing. But before the separation process was entirely  completed, the employee learned she was pregnant and wanted to withdraw her resignation. Does the employer have to take her back? The answer is likely no. First, Chinese laws give the employee the right to unilaterally terminate a labor contract by giving 30 days written notice, and the employer cannot make it more difficult for the employee to quit. In other words, once an employee gives his or her written notice, the employment relationship will be terminated once the 30-day period has passed. On the flip side, once an employee quits, he or she cannot revoke this decision unless the employer agrees. Under this scenario, the decision to leave was of the employee’s own free will and since the employer does not want to revoke the employee resignation, forcing the employer to take the employee back would be both unjust and unlikely to happen.

It gets a lot trickier if the employee’s departure is a result of her employer unilaterally terminating her. In that situation, if the employer’s termination was lawful it probably will not be ordered to rehire the now pregnant ex-employee. But if the employer did not correctly terminate this employee, the employer will almost certainly be required to rehire the now-pregnant employee. In fact, the employer would probably be required to rehire this employee even were she not pregnant. However, in the case where the employee is pregnant, it means the employer must not only reinstate that employee, it means it will also now need to treat her with extra care and afford her more protections and benefits than other regular employees. It also means the employer must give the employee paid maternity leave of 128 days, more depending on the location.

Regardless of the reasons for having to rehire an employee, you will need to do that correctly as well. Among other things, this usually means you should execute a new employment contract since the last thing you want is to find yourself in a situation where you employ someone without a written employment contract — especially someone you wanted to terminate.

China law firm for arbitrationA European company once came to my law firm wanting us to assess an arbitration it wanted to bring in Geneva, Switzerland between its China WFOE (the putative plaintiff) and a Chinese domestic company (the defendant) with which it had contracted. The contract provided for arbitration in Geneva and the European company wanted our China attorneys to assess its chances.

We did not like our client’s chances on many grounds and no arbitration claim was ever filed. One of our reasons for not liking our client’s chances is a somewhat obscure Chinese law that often trips up foreign companies with China WFOEs or China Joint Venture entities. The law is commonly called “the Domestic Rule” and it provides that only “foreign-related” disputes can be arbitrated outside China.

I describe this law as “somewhat” obscure because every good Chinese lawyer who represents Chinese companies with foreign investors knows this law well and knows exactly how to use it to give a big advantage to their Chinese company clients; it is only obscure for foreign lawyers. Check your China Joint Venture Agreement and if it provides for internal company disputes between your company and your Chinese joint venture partner to be resolved via arbitration outside China, you have probably been taken for a ride by a Chinese lawyer who knew exactly what she was doing. And this is pretty much the norm when the foreign party in a China Joint Venture makes the massive mistake of using its joint venture partner’s lawyer to draft the joint venture agreement.

Under Chinese law, for a dispute involving a Chinese company to be viewed as “foreign-related,” it typically must involve at least one of the following:

  • At least one foreign party. Note that China WFOEs and Joint Ventures are usually not considered to be a foreign party. Note though that Hong Kong, Taiwan and Macau entities are generally viewed as foreign parties.
  • The facts or the subject matter that give rise to the lawsuit occurred or exist outside Mainland China.

If you secure a foreign arbitral award against a Chinese company and you do not have a basis for being able to circumvent the Domestic Rule there is a good chance no China court will enforce your arbitration award. If the Chinese company you are pursuing has assets outside China, you may be fine, but if it does not or if you are seeking to change the operations of a China Joint Venture, your arbitration award will probably prove worthless.

The way to avoid this sort of problem is to draft your contracts to provide for disputes to be resolved in China, either in its courts or before one of its domestic arbitral bodies, such as CIETAC. See CIETAC Arbitration: Different But Fair.