China Joint VenturesAn old saying about lawyers is that we do well when the economy is rising and when the economy is falling and we do especially well when big changes are expected. Flat and steady we don’t like. The same holds true for China lawyers.

Well our China lawyers have lately been working nearly around the clock on forming WFOEs and working on Joint Ventures for American and European companies that want to set up a business in China, oftentimes because they see doing so as providing them cover should a trade war ensue. They are of the view that having a China business will make them less susceptible to duties and tariffs and blockages. We are seeing the same thing with Chinese companies seeking to enter the United States and Europe, either on their own or by buying American or European companies.

Today’s post focuses on China Joint Ventures for the simple reason we have not written on joint ventures since July of 2016, and that post mostly focused on how distributer contracts can be a great alternative. As part of our return to joint ventures, we will focus on the basics with this point.

As we so often point out, China joint ventures are notorious for their high failure rate. An old Chinese saying often applied to joint ventures is “same bed, different dreams.” This Chinese saying (同床异梦) actually predates joint ventures and it applies to any sort of partnership without a meeting of the minds. American companies and Chinese companies far too often rush into joint ventures without ever discussing their respective dreams. The sooner you seek to discern whether you and your potential China joint venture partner share the same dreams, the sooner you will know whether to keep spending time and money in trying to do the joint venture deal, or simply walk away.

So towards that end, we compiled a list of questions for our clients to discuss with their potential Chinese joint venture partner to help determine whether there is enough commonality to move forward in trying to enter into the joint venture deal.

  • Why are you seeking to accomplish with our joint venture?
  • What will you do for, and with, the joint venture?
  • What will your company do to advance the business of the joint venture and what exactly do you want our company to do to advance the business of the joint venture?
  • Who will make business decisions for the joint venture, and what mechanisms will we use for reaching a decision? Who will control what? Who will make what decisions? The more specific you get here, the better.
  • What will we each contribute to the joint venture? Property? Technology? Intellectual property? Money? Know-how? Employees?
  • If the joint venture loses money, who will be responsible for putting more money in?
  • How will we resolve disputes? Chinese companies love responding to this with something along the lines of “we will work out any issues among ourselves and if that fails, we will have a special meeting to try to resolve everything. That sort of answer is essentially meaningless. The answer you want is the one that explains exactly how day to day disputes will be resolved so the joint venture does not collapse?
  • Can either of us use confidential JV information for our own business? Can our own businesses compete with the JV? Can our own businesses do business with the JV?
  • How and when will the joint venture end? What if one of us wants to buy the other one out?

Posing these questions puts dreams to the test. For the better.

For more on China joint ventures, check out Joint Venture Jeopardy and Avoiding Mistakes in China Joint Ventures.

 

Alibaba FraudLexology ran an excellent article the other day, entitled, Catching the Bad Guys: Recovery for a Defrauded Alibaba Buyer. The article was written by Kai XUE of DeHang Law Offices. Our China lawyers can attest to the need for this sort of article as hardly a week goes by where we are not contacted by someone with a major China Alibaba supplier problem. Note though that these issues are certainly not confined to Alibaba. The article nicely sets out how to handle a situation where you have sent payment for an Alibaba purchase but you receive “either junk or nothing and [you] can no longer reach the seller.” As noted in the article, most of these fraud situations involve a Chinese seller that “is a newly registered entity with little registered capital that uses a fake office address.”

Initiate a police report. The article notes that in a fraud case, you should report the crime to the police to try catch the fraudulent seller and to try to recoup your monetary loss. The article rightly notes the importance of going to the police quickly and ignoring various stalling tactics employed by the seller:

When confronted fraudulent sellers will reflexively claim that the matter is a commercial dispute to avoid involving the criminal justice system. For this reason, in cases of clear fraud it is advisable to proceed quickly to report to police and ignore last minute entreaties by the suspect to amicably settle. These apparent attempts by the fraudulent seller to settle not only may be an insincere attempt to delay for time but are also designed to create the appearance of a commercial dispute to dissuade police from pursuing an investigation.

The article notes the importance of going to the right police department (Hong Kong or Mainland) and of going to the police department with sufficient evidence to entice them to pursue an investigation.

Negotiating a settlement with the suspect. The article goes on to discuss how negotiating for restitution with the seller often should be undertaken, even in conjunction with the police pursuing its investigation of the seller:

Once put in detention and questioned by police, the realization of serving prison time acts as a strong impetus on the fraudulent seller to settle claims with the buyer. In exchange the buyer can agree to make best efforts to end the police investigation or ask for leniency for the fraudulent seller before the court if the case has advances to an indictment.

According to Chinese law, if an accused person returns some or all of the defrauded money and obtains a written pardon from the victim, her/his criminal responsibility may be mitigated. It’s on this basis that a fraudulent seller looks for a reduced sentence or release from detention by striking a deal with the buyer.

The article notes that one way to be able to tell whether the fraudulent seller has exhausted its available resources is “the extent that the fraudulent seller’s immediate and extended family make contributions:”

If a family member of the fraudulent seller provides a mortgage over real property or liquidates real estate assets to pay for restitution, then it’s likely that the fraudulent seller has cobbled together the maximum possible restitution payment.

 

Bottom Line: If you have been defrauded by an Alibaba seller (or any other China seller for that matter), the key is to act as quickly as you can in going to the police and in trying to negotiate repayment from the defrauding seller. The quicker you act, the more likely you are to get at least some of your money back.

China trademark. China Customs.
1. Register your trademark in China. 2. Register your China trademark with China customs.

One of our China lawyers got the following email from a client the other day about an AmCham China IP event:

Just saw that AmCham is putting on this Innovative Approach to Stop Counterfeit Goods and just wanted to congratulate you for having convinced me to institute that approach nearly five years ago.

The “innovative” approach to which both AmCham and the writer of this email are referring is the following, as described by AmCham in its lead-up to this talk:

Many companies with large overseas operations have to deal with lost revenues and reputational damage caused by counterfeit goods. As well as being a large potential market, China is also major manufacturing hub, for both fake as well as genuine products. Despite improvements in the legal framework regarding intellectual property rights, companies are often disappointed by the results of their attempts to prevent the proliferation of counterfeit goods through through the courts, the Ministry of Commerce and local governments.

Now there is a new, innovative approach to stemming the trade of counterfeit products. Based on their experience working with numerous clients, experts … will share details on how the Customs Bureau can help companies in the fight against counterfeits.

Seeing as how none of our China attorneys attended this event, we do not know what was discussed at it. But we can tell you what we have been saying on this blog and to our clients since at least 2013, and that is that not only must you file for a China trademark for your brands and your logos, but you should also then register your granted China trademark with China customs to stem counterfeits of your products from leaving China.

For instance, earlier this year, in China Trademarks: Customs Helps Those Who Help Themselves one of our China IP lawyers, wrote the following regarding the real benefits to be gained by registering your China trademarks with China customs: “For trademark owners, customs seizures can be a valuable part of an anti-infringement strategy. But don’t expect much help from the customs authorities if you can’t be bothered to help yourself.”

But long before that, way back in April, 2013, we wrote a post, Register Your China Trademark Now. Then Register It Again With Customs, where we called for exactly what the title of that post would lead you to expect: that you should not only be sure to file for a trademark in China, you should also be sure to take that China trademark once you get it and register it with China customs. It bears repeating what we said in that post because it so nicely sets out what exactly this will entail and why it is of such importance:

The implication for foreign companies doing business in China is clear: Chinese Customs can help protect your IP from infringement…. What the numbers [of China customs seizures] don’t tell you, however, is that nearly all of the seizures were of goods that infringed registered Chinese trademarks, and that those trademarks had been registered not only with China’s Trademark Office but also with Chinese Customs.

As we have written a number of times — see File Your Trademark In China. Now., China: Do Just One Thing. Trademarks, and China’s Changing Trademark Environment. Why You Need To Register Your Trademark Now. — the essential first step in any China IP strategy is to register your trademarks with China’s Trademark Office. Because China is a first-to-file country, until you register a trademark you have no rights in that trademark. But a trademark registration alone will not limit the spread of counterfeit goods. A trademark registration merely gives you the legal capacity to enforce your rights to that mark, and should properly be seen as one of the pieces in an overall strategy.

For any company concerned about counterfeit goods coming from China, the next step should be registering your trademark with Chinese Customs. This is not a legal requirement but a practical one: though China Customs officials have discretion to check every outgoing shipment for trademark infringement against the Trademark Office database, in reality they only check against the Customs database. No separate registration with Customs means no enforcement by Customs.

If you register your mark with Customs, they will contact you any time they discover a shipment of possibly infringing goods. At that point you have three working days to request seizure of the goods. Assuming you request seizure (and post a bond), Customs will inspect the goods. If Customs subsequently concludes the goods are infringing, they will invariably either donate the goods to charity (if the infringing mark can be removed) or destroy them entirely. The cost of destruction, and of storing the goods during the inspection process, will be deducted from your bond.

Registration with China Customs generally takes three to five months and can only be done after China’s Trademark Office has issued a trademark certificate. The latter currently takes approximately fourteen months, which means that within nineteen months of the date you file your trademark application, Chinese Customs could be helping to stop counterfeit goods from being exported from China.

Nineteen months can be an eternity in the retail world. Whether you’re a toy company producing dolls in Shanghai, a home video company making DVDs in Guangzhou, or a luxury goods company manufacturing high-end purses in Qingdao, there’s only one approach that makes sense. Register your China trademark now. Then register it again.

So though we never saw registering your China trademark with China customs as innovative, we have always viewed it as important, and that really is all that matters in any event.

China employee benefits
China employee benefits: the myths.

China employers must provide certain mandatory benefits to their China employees (both Chinese and expat), and failing to do so can expose them to serious risks. In this post, I discuss six common myths about my firm’s China lawyers often hear or get asked about regarding mandatory employee benefits.

Myth 1: Employers need not pay into an employee’s social insurance during the employee probation period. Wrong. Your obligation to contribute to your employees’ social insurance starts when the employment relationship commences. Do not delay setting up your employees social insurance account or completing the transfer from the previous employer.

Myth 2: Employers need not provide any social insurance benefits to part-time employee. In most places in China, employers are required to pay for a part-time employee’s occupational injury insurance. Whether or not an employer is able to enroll such employee in just this one type of social insurance, rather than the full set of mandatory social insurance program, depends on your locale. For how virtually everything regarding China employment law is localized, check out China Employment Law: Local and Not So Simple.

Myth 3: An employer registered in City A with an employee who resides and works in City B can pay the employee cash to cover the employer’s portion of social insurance contributions. Wrong. Very wrong. The social insurance payments must be made under the name of the employer or, to the extent permitted under the law in the relevant locale, under the name of a qualified HR company. Either way, paying an employee (full-time or part-time) cash is never the right way to go. Note that hiring employees in other cities implicates company formation issues and should always be coordinated with the human resource and social security bureaus of both the city in which your company is located and the city in which your not-so-local employee is located and companies that get this wrong usually pay a very steep price.

Myth 4: Employers decide whether to make housing fund contributions for their employees. Issues regarding employee housing fund contributions do not come within the jurisdiction of the local human resource and social security authorities, but rather are overseen by a different agency. However, this does not mean you as the employer can simply opt out of this program. You must make such contributions for your China employees and if you do not know what these contributions are all about, you should find out.

Myth 5: Employers need not pay into a non-Chinese employee’s social insurance fund. That depends. In some cities (Beijing and Shenzhen, for instance) you cannot contract out of such obligations for non-Chinese employees. However, in other cities (Shanghai, for example) employers can enter into a contract with their foreign employees that relieves them out of having to contribute social insurance for their foreign employees. Note though that this contract has to be a valid and enforceable one under Chinese law and our China attorneys rarely see one that qualifies.

Myth 6: Employers can stop paying social insurance for an employee on statutory sick leave. Wrong, wrong, wrong. Statutory sick leave is defined as a period when the employee gets to take time off to recover from a non-work related injury or illness without having to worry about being unilaterally terminated by the employer. The employment relationship is not severed by such a leave and that means you as the employer must continue making all required contributions during your employee’s statutory sick leave.

For more China employment law myths, check out Six Myths About China Employee Probation, Six Myths About Working Hours and Overtime, and Six Myths About China Employee Non-competes.

Doing business in China.
Doing business in China: relax, you have choices

CNBC recently quoted me in a fascinating article entitled, More and more American companies have decided their big China opportunity is over. The article is by Evelyn Cheng, who consistently writes excellent pieces on China.

The article starts out by noting how China may no longer be “the world’s biggest business opportunity” for American companies. It then cites McDonald’s being in talks to “sell its China unit and license its name to a Chinese company instead, following Yum Brands’ decision to do something similar.” It then (100% accurately) quotes me saying the following:

“The trend is that opening retail business on the ground in China as a foreigner is difficult and expensive,” said Dan Harris, lawyer at Harris Bricken and author of the China Law Blog.

We have for years tried to push a lot of our clients not to do that, but instead do what McDonald’s and Yum Brands are doing, which is … monetize your name and your knowledge without actually being the one who does all the work to make it work in China,” Harris said. “China is a tough, tough market.”

All true.

Except, and just to be clear, the China lawyers at my law firm do not believe there is a one-size-fits all solution for going into China in the retail industry, or in any industry for that matter. And — again, just to be clear — I would not in a million years claim to know better what is right for McDonalds or for Yum Brands in China, as I am quite certain both of those companies know 1000 times better than I do what is right for them.

So, yeah, not going into China with 5-200 retail outlets makes a lot of sense a lot of the time, but a lot of the time it does not. Yeah, our China attorneys oftentimes try to steer (or “push”) some of our retail clients to get away from the idea that the only way for them to make money from China is to set up their stores in Shanghai, Shenzhen and Suzhou, just as they have done in Palmdale, Portland or Peoria. Our goal (indeed our job) as China attorneys is to explain the various options to our clients and to give them the pros and cons of each. The key thing we want them to know is that they have choices and that they should analyze their choices and not just do what some similar company down the street from them did two years ago in China, nor even necessarily what their China consultant is telling them to do.

So let’s talk about some of the options for a Western retail company that is looking to profit from China by doing business in China, and the pros and cons of each.

  1. Go into China Full-On as a WFOE. Under this scenario, the Western company forms a WFOE in China (for all that entails, check out How to Form a WFOE in China). The benefits of doing this are that you are in full control of your China operations because you 100% own your China operations and you can operate them as a subsidiary of your US or your European operations. This way of going into China makes sense if 1) you cannot — for whatever reason — relinquish control of your stores or your product to another company or 2) you eventually want to franchise your stores in China as China requires that you first own your own stores there before you can franchise them out. The negatives are that setting up a WFOE is time consuming and expensive. See Forming a China WFOE: The Method and the Madness. And going all into China as a WFOE in the retail sector can be particularly difficult because your WFOE in Shanghai does not entitle you to just start doing business in Shenzhen. No, to get into Shenzhen, you typically will need to set up a new WFOE or a branch office there, and then figure out all of the issues that come with that, including even whether. Is your company truly ready to navigate China? I cannot urge you enough to read this post from 2012: Are You China Ready, which details a speech on this topic given by Ben Shobert.
  2. Go into China as Part of a Joint Venture. The big plusses of China joint ventures are that you typically share in the costs with another company and you have a Chinese company as your partner in China. For the big negatives, of which there are many, check out China Joint Ventures: The Tide is Out.
  3. Go into China Via a Distributor Relationship. A great thing about distribution relationships in China is that you have a lot of flexibility in how you structure that relationship. See China Distribution Agreements in Real Life. You can give your China distributer exclusive rights for all of China, or for just one city, or no exclusivity at all. You can set all sorts of sales requirements for your China distributor, ranging from sales amounts to exactly how your product will be placed on store shelves. But better than this is that you can usually get your retail products into China cheaply and quickly via a distributor. The downside of this is that by sharing the risks with your distributor, you will also need to share in the profits.
  4. Go into China Via a Licensing Agreement. Under a licensing agreement, you can license your product name and other attributes to a Chinese company, and you can even add in many of the same requirements you might put into your distribution contract. The upsides and the downsides of a licensing agreement are very similar to those of a distribution contract. For more on China licensing agreements, check out China Licensing Agreements: The Extreme Basics and Fear The China Joint Venture And Front-Load Your China Licensing Agreements.

Bottom Line: The one right way to start doing business in China is to work on figuring out the best way for you and your company.

Importing from China
Importing from China. Get it right.

Companies importing goods from China into the United States may find themselves in having to respond to a U.S. Customs and Border Protection (“CBP”), Request for Information (CBP Form 28) or what may be worse, a CBP Notice of Action (CBP Form 29). The CBP Form 28 – Request for Information is a tool routinely used by CBP to solicit additional information about a shipment to verify if the goods are properly classified, valued or otherwise meet U.S. import requirements. The CBP Form 29 – Notice of Action can be used to inform an importer of a proposed action, including assessment of additional duties on the goods, or to notify the importer that the action has already been taken by CBP. Both communications may be considered red flags for CBP to investigate prior transactions of an importer and for CBP to initiate a penalty investigation.

Though you as an importer may have an easy response to a CBP inquiry or a valid basis as to why the CBP’s proposed action should not be taken, your response often may require you to provide information from your China (or other) manufacturing supplier. In these situations, it can be critical for your supplier to work with you the importer in the United States, to ensure you have all necessary information for the goods you imported. It is also critical that your communications with the CBP not provide the CBP with information the CBP can use against you. Pulling together a sufficient response together for the CBP within a short time frame can be no small task, but you can almost always ease that task and improve your odds by anticipating and preparing for your customs problems within the framework of import procedures and controls.

It is a common misconception among importing companies that they do not have to be exact on their commercial invoice or other import documentation. But to properly import goods for entry in the United States, a complete product description, accurate country of origin, and correct value in accordance with CBP rules are all key pieces of information which must be accurately provided. These requirements fall under the importer’s legal responsibility to exercise “reasonable care.” If you as an importer fail to attend to these basic legal requirements, you will be greatly increasing (1) your risk of delays in the release of your goods, (2) further scrutiny by CBP through an audit, and (3) penalties.

The import compliance burden shifted to U.S. importers in 1994, when Congress passed the Customs Modernization Act of “Mod Act” as a part of the same legislation package as the North American Free Trade Agreement (“NAFTA”). It is under the Mod Act that CBP expects importers to exercise “reasonable care” when addressing the following, per the CBP Reasonable Care Checklist:

  • Customs documentation for entry;
  • Complete merchandise description for tariff classification and proper duty rates;
  • Valuation of merchandise consistent with specific CBP valuation rules;
  • Country of origin verification, marking, labeling;
  • Free trade agreements; and

Though the above list is not meant to be an exhaustive one, it tracks key compliance components in the reasonable care checklist.

Despite its name, the CBP Reasonable Care Checklist is not a formulaic standard, but rather a list of questions to prompt U.S. importers to create their own internal framework or methodology to meet United States import compliance standards. CBP allows U.S. importers flexibility in how to manage their reasonable care responsibilities based on the importer’s own transactions.

If you import from China, your first step in managing your reasonable care responsibilities so as to minimize your importing compliance risks is to start with the basics and become familiar with the CBP Reasonable Care Checklist. Answering the questions posed by CBP will help you formulate your necessary internal import procedures and controls.

 

 

China manufacturing Lawyer
Photo from our lunch in Shenzhen.

When I was in Shenzhen last month, co-blogger Steve Dickinson and I had a long lunch with China manufacturing guru, Renaud Anjoran of Sofeast. During our lunch, we talked extensively about what we were seeing in China manufacturing these days, particularly in the electronics and Internet of Things sector in China. As we always do, we shared many of the horror stories we were seeing and hearing about as it is from those that lessons get learned.

During that lunch Renaud told us of an American (or was it European?) company that had chosen to pay its Chinese manufacturer in advance, believing that by doing so, it would make for a “great relationship.” Instead, it led the Chinese manufacturer to keep the money and never make a thing. Renaud told us that he knew the manufacturer and he insisted that the manufacturer was not a crook, but that it simply could never prioritize making products for the company that had already paid it over those companies for whom it NEEDED to make product to get paid. The lesson learned from this story is how critical payments terms can be in influencing what gets made and how.

Renaud recently did a terrific post explaining this payment-results connection, entitled,T/T Payment Terms with China Factories: Set the Right Incentives. Renaud starts off this post by noting that “at the end of the day, what the factory really looks at is, ‘how much of the order did we get paid, and how much room for maneuver do we we have right now?’” He goes on to talk about how Chinese factories very much tend to be “focused on the short term” and this means you as the buyer need “to think very carefully about payment terms.” In other words, “you need to make sure your Chinese supplier, who has over-promised to 10 customers and needs to disappoint 5 of them at some point, will think twice before deciding you will be among the unfortunate ones.” I 100% agree.

The article then sets out the following various payment options and the pros and cons of each:

 

100% T/T pre-payment. This is a beginner’s mistake. Renaud remarks on never having seen this sort of payment plan work out well in his 10+ years working in China and neither Steve nor I can recall such payment terms working out well either. Neither can I. I can though recall a number of such companies calling me because they have not received their products. I also recall getting a negative answer to the one question I always ask whenever a foreign company calls me with a China manufacturing problem: Do you have a written Manufacturing Agreement in Chinese that is crystal clear about what your Chinese manufacturer must provide you? I also recall being amazed at how many times the response was something like, “we don’t because we didn’t want to get off on the wrong foot with them” and then my telling them that our China lawyers would not be interested in taking on their case.

Renaud correctly notes that this sort of payment plan gives your manufacturer “zero incentive to perform.”

30% T/T deposit, 70% T/T payment after passed QC inspection. Renaud describes this sort of payment plan as quite common and it is the one we typically see offered by Chinese manufacturers, especially in the electronics industry. Renaud describes these payment terms as being a “generally a balanced and fair deal,” but still with “a number of risks for the buyer” and he recommends negotiating a lower initial deposit, “especially if the products are very standard and could easily be sold to another customer” and payment of the remainder only after the product ships. .

20% T/T deposit, 50% T/T payment after production and after passed QC inspection, 30% after delivery in buyer’s country. These payment terms give you “some leverage until you receive the goods. If the manufacturer played games during the inspection, or ‘salted’ bad products into your order just before shipment, you can still catch it.”

Letter of credit (L/C) at sight. Renaud rightly notes that “only some suppliers accept a payment by L/C.” He then also notes that though these payment instruments favor the buyer, they are expensive. Our China attorneys are generally not big fans of letters of credit. First, it truly is the rare Chinese manufacturer that will accept them. Second, they are really expensive. Third, they have to be done right or they are essentially worthless, and they are rarely done right. Fourth, you need to use a trusted bank for one and Chinese banks do not generally fall into this category if you are a foreign company having your product manufactured in China.

100% T/T payment 2 months after shipment, with no deposit. This is sort of the gold standard for buyers, but even this payment arrangement is not without at least some risk:

However, if you have an ongoing business relationship with a supplier that you pay that way, you are still ‘hooked’ to a certain extent. Above all else, you probably need continuity of supply. If you find quality issues and you act in a way the supplier sees as unfair, they might stop shipping goods to you!

Renaud’s article then discusses how Chinese manufacturers take advantage of foreign buyers (especially in the Internet of Things sector) by not requiring “the foreign company to pay for the non-recurring engineering costs such as tooling, firmware code development, etc.” This is done as part of a strategy “to gain the upper hand in the business relationship in the long term” and “this is extremely dangerous for buyers of highly customized products.” If you want to know how dangerous this can be, check out China and The Internet of Things and How to Destroy Your Own Company or Hardware Co-Development in China: Do it Right, Part 2, from which Renaud quotes extensively:

The foreign designer and the Chinese factory will work together for months or years to develop a commercially viable product and then when the prototype is finally finished, the question then becomes who actually owns the prototype: the foreign developer that came up with the idea or the China factory. The foreign developer says it owns the product while the Chinese factory says it owns it. Who does legally own it? Way more often than not, the Chinese factory does.

How does all this come about? The standard scenario goes something like the following. A foreign product designer comes to China and works with a Chinese factory to commercialize an innovative hardware or IoT product design. In a cooperative co-development setting, the foreign party and the Chinese factory work together to create the prototype of the commercial version of the new product. All the work is done on a purchase order basis, with no written contract or other documentation.

At the end of the development cycle, the Chinese factory announces to the foreign developer that the prototypes are completed. The factory retains the prototypes in anticipation of moving to the manufacturing phase. However when the parties move to the manufacturing phase, it is normal for something to go wrong. This can happen in two ways. First, the Chinese factory surprises the foreign designer by substantially increasing the projected unit price for the product or it announces that it cannot meet the quantity or delivery date requirements for the product. Second, the factory consistently manufactures product with substantial product defect/quality control issues.

Facing these problems, the foreign party confronts the Chinese factory and announces that it is going to take the prototypes and have them manufactured by another factory. The Chinese manufacturer replies: “you cannot do that. We own all the IP contained in the product. We agree that we will manufacture the product for you exclusively for as long as you are willing to order on our terms. But you cannot take that prototype anywhere else. Only our company has the right to manufacture that product. And, if you are not successful in making substantial sales, we will cut you off and market the product ourselves.”

The real problem with this scenario is that in most cases the factory is absolutely correct about the legal situation concerning the intellectual property in the new product. Stated simply, absent a written contract to the contrary, it is generally true in this setting that the factory DOES own the intellectual property in the product.

Renaud then notes how Steve describes the legal consequences, but “from the perspective of the buyer, it is worse”:

In many cases they PHYSICALLY can’t do anything. The mold is in the Chinese factory; developing and fine-tuning a new one would take time and money. Maybe some code was developed for the firmware, but again the supplier (or, often, a sub-supplier) keeps the source code.

In such a case, having a contract that clearly spells out who can do what with the finished product, is extremely important. You will probably have to pay for some/all of the non-recurring engineering work for the supplier to agree to this.

Bottom Line: When outsourcing your product manufacturing to China, your payment terms matter. A lot.

 

china employment lawyer

Earlier this year, the PRC Ministry of Human Resources and Social Security (“MOHRSS”) issued a set of Measures for Evaluating Compliance and Integrity of Employers’ Labor Protection (《企业劳动保障守法诚信等级评价办法》). These Measures are set to take effect on January 1, 2017 and will apply to all China employers, domestic and foreignSo if have employees in China and you have not already done so, NOW is the time to ask yourself, do you feel ready?

Under these new measures all employers in China will be evaluated annually, and based on their legal compliance and any violation, they will be divided into 3 categories: A, B and C, with C being the lowest category. In conducting its evaluations, the relevant human resources and social authorities will consider all of the following:

  • whether the employer has formulated its internal labor protection rules and regulations
  • whether the employer has executed employment contracts with every employee
  • whether the employer is in compliance with labor dispatch laws
  • whether the employer is in violation of the child labor laws
  • whether the employer is in compliance with laws regarding female workers and underage workers
  • whether the employer is in compliance with laws on working hours, rest time and leave
  • whether the employer is in compliance with laws regarding employee remuneration and meets the applicable minimum wage standard
  • whether the employer contributes all mandatory social insurance
  • whether the employer is otherwise in compliance with labor protection laws and regulations

For employers in Category A, the frequency of administrative checks by the local labor authorities will be reduced, while the frequency of inspections for employers in Category B will be increased appropriately (whatever that means) and employers in Category C will become subject to the most scrutiny. Also for employers in Category C, the person-in-charge will be required to schedule meetings with labor authorities to be reminded of the importance of following labor protection laws. The evaluation results will be kept on file for a minimum of three years. You do not want to find yourself in Category C, or even B!

Also taking effect on January 1, 2017 is MOHRSS’ Measures of Public Disclosure of Significant Violations of Labor Protection Laws (《重大劳动保障违法行为社会公布办法》). Under these Measures, if a China employer commits a serious violation of Chinese labor and employment laws, it may be made public by the labor authorities. The following rulings/decisions on employer violations of China’s labor laws may become public:

  • Failing to pay “substantial” employee remuneration
  • Failing to pay employee social insurance and the circumstances are “serious”
  • Violating the laws on working time or rest or vacation and the circumstances are “serious”
  • Violating the special rules on protecting female workers and underage workers and the circumstances are “serious”
  • Violating any child labor laws
  • Causing significantly bad social consequences due to violations of labor laws
  • Other serious illegal conduct

When publishing these labor law decisions, the following information will be released to the public (with exceptions for national security, trade secrets or individual privacy):

  • The employer’s full name, integrated social credit code/registration number, and address
  • The name of the legal representative or the person-in-charge
  • The main facts of the violation
  • The decision made by the authorities

This information will go into the employer’s credit file on integrity and legal compliance and may be shared with other governmental departments. China’s local human resources and social security bureaus will be responsible for clarifying and implementing these rules.

Bottom Line: Effective on the first day of January 2017, two important sets of rules will be implemented by MOHRSS to deter employers from violating China’s labor and employment laws and regulations. Go ahead and call these legal changes the China employment lawyers full employment act (as a couple of our clients already have), but just make sure you are in compliance and you stay in compliance,

NOW. 

 

China employment lawyer There are many issues and many myths related to China employee non-competes, in large part because this is a complicated and very localized aspect of China employment laws. In this post, I set out the following six common myths I and the other China lawyers at my firm often hear from our clients regarding China non-compete agreements:

Myth 1: A China employer can have a non-compete with anyone. Non-compete agreements are permissible with only senior management, senior technicians and other personnel who have a confidentiality obligation. The last catchall category is not to be confused with “any employee.” If you enter into a non-compete with an employee that did not have access to your confidential information (note that such information must be information the employee gained from working for you), your non-compete will likely be deemed unenforceable. Also, note there is no legal requirement that you enter into a non-compete agreement with all of your employees.

Myth 2: A China employer can set the non-compete period for as long as it wishes. Wrong. The maximum period for an employer to prevent an employee from competing is generally two years after an employee’s departure.

Myth 3: A China employer can terminate a non-compete anytime it wants, because it is releasing the employee from non-competition restrictions. Wrong. Once signed, a non-compete becomes a legally binding agreement on both parties. You cannot walk away from a non-compete without having to pay a penalty to the employee. Note also that some locales in China also require that you pay any promised employee non-compete compensation through the end date of your non-compete agreement, no matter what.

Myth 4: A China employer can walk away from a non-compete that is silent on the payment amount for non-competition during the non-compete period because such an agreement is void. Not sure why, but our China attorneys have been hearing this one a lot lately. Even though China’s national employment laws do not explicitly address this issue, generally speaking, if an employee can show he or she performed on the non-compete obligations, the court will deem it unfair to declare the non-compete agreement invalid. We are seeing local differences on this issue. Some places (such as Shanghai and most parts of Beijing) believe that the lack of non-compete compensation is a “flaw” that can be fixed by the parties and therefore does not automatically render the entire agreement void, while others hold the opposite position. For those places that do not believe such a non-compete agreement is automatically void, 30% of the employee’s average monthly salary in the 12 months before termination (or the local minimum wage) will generally be applied.

Myth 5: The contract damages amount will be enforced because a contract is a contract. It usually makes sense for a China employer to set a contract damages amount in its non-compete agreements to both deter its employees from breaching the agreement in the first place and to provide a concrete monetary amount when it comes to enforcement. However, for either of these things to be true, you need to set this amount carefully; it should be neither too high nor too low. If a court views your contract damages amount as significantly disproportionate to the non-compete compensation you have been paying your former employee, it will likely ignore your set amount entirely. 

Myth 6: If your China employee breaches its non-compete agreement during the term of his or her employment, you as the employer have free reign to penalize this employee. Wrong. Generally speaking, regardless of the circumstances of an employee’s departure, you as the employer must (among other things) provide your soon to be ex-employee with a Proof of Termination of Employment Relationship document. This is a right afforded to every employee by China’s labor laws. You should think long and hard before you hold off on performing any of the myriad legal obligations you owe to your employee just because you believe that employee has breached a contractual obligation he or she owes you.

Bottom line: 1. Choose with whom you will be entering into a non-compete wisely. 2. Craft your non-compete agreements wisely. 3. Enforce your non-compete agreements wisely. 4. Ignore the myths.

For more China employment myths, check out Six Myths About China Employee Probation and Six Myths About Working Hours and Overtime.

 

 

So in the last three months I have received a couple of emails from students in international law schools in China asking me about their job prospects. My responses have been anything but encouraging, to the point that I feel it would be wise for me to publicize my counsel.

China attorney
I fear this is true of this subset of China law schools

Here is somewhat of a merger of the two emails:

I am ________________, a third year student of International law at ______________ University in China. I am a ___________ citizen and I will be graduating next year.

_______________ contacted me for an interview about “Going to school in China” and during our conversation, I mentioned that our university is not helping us find an internship. Moreover, we as foreigners are not allowed to practice law in China. That is why I couldn’t answer him when he asked me about my future plans. I frankly have no idea if my degree will be recognized abroad or where should I be doing my internship. He recommended your blog to me and also suggested I ask you for some advice.

I would be highly obliged if you could advice me on where I should look for an internship and how. Our university wants us to have an internship of minimum two months. I am also studying Chinese language along with my degree here. Our course is taught in English but they also give us Chinese classes. I can say my Chinese is good enough to carry out normal conversations with Chinese people.
It would be really helpful in to find a good job after my graduation if I can find an internship in an international law firm before my graduation.

Really looking forward to your suggestions!

Because one of the students had been referred to me by a China law professor/China lawyer I know, I felt some obligation to do some brief research regarding the situation and I found the following:

  1. There are international law schools (at least one anyway) in China that teach Chinese law to students from all over the world, with English as the language of instruction.
  2. These students believe that upon graduation they will be readily employable by “international law firms” seeking new lawyers knowledgable about Chinese law.
  3. The students who graduate from these law schools cannot sit for the China bar.
  4. As far as I know, the students who graduate from these law schools cannot sit for any bar in the United States either. In fact, near as I can tell (though I certainly may be wrong about this), these students cannot sit for the bar in any country in the world.
  5. If I am right about #4 (and nobody has yet told me I am wrong on this), this means that graduating from one of these law schools does not help you to become a lawyer.
  6. Even if graduates from one of these law schools can sit for the bar in some country somewhere, I can only imagine it will be extremely difficult for any of these graduates to get a good law job. These law schools do not have any reputation anywhere (as far as I know). I am an active and long time China attorney who has the additional benefit of people constantly contacting us because of this blog. Yet I did not even know of the existence of these schools (Again, I am aware of only one such school for certain, but I hear there are others) until only very recently.

What is going on here? Do I have my facts right? People, please help me (and anyone considering one of these China law schools) out here.