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China lawyers for counterfeitsWith Amazon and Ebay having increased their efforts at bringing in Chinese sellers and with more and more Chinese manufacturers branching out and making their own products, the number of companies contacting our China lawyers about problems with counterfeit products and knockoffs has soared. If the problem involves infringing products being imported into the United States, powerful remedies are available to companies with US IP rights. One of the most powerful remedies is a Section 337 case, which can block infringing products, regardless of their origin, from entering the U.S.

A Section 337 action (the name comes from the implementing statute, 19 U.S.C. 1337) is available against imported goods that infringe a copyright, trademark, patent, or trade secret. But because other actions are usually readily available to owners of registered trademarks and copyrights, Section 337 actions are particularly effective for owners of patents, unregistered trademarks, and trade secrets. Although generally limited to IP rights, in the ongoing Section 337 steel case, US Steel has been attempting to expand the definition of unfair acts to include hacking into computer systems and antitrust violations.

The starting point is a section 337 investigation at the US International Trade Commission (“ITC”).  If the ITC finds certain imports infringe a specific intellectual property right, it can issue an exclusion order and U.S. Customs will then keep out all the infringing imports at the border.

Section 337 cases have been brought and exclusion orders issued against a vast range of different products: from toys (Rubik’s Cube Puzzles, Cabbage Patch Dolls) to footwear (Converse sneakers) to large machinery (paper-making machines) to consumer products (caskets, auto parts, electronic cigarettes and hair irons) to high tech products (computers, cell phones, and semiconductor chips).

Section 337 is a hybrid IP and trade statute, which requires a showing of injury to a US industry. The injury requirement is very low and can nearly always be met–a few lost sales will suffice to show injury. The US industry requirement can be a sticking point. The US industry is usually the one company that holds the intellectual property right in question. If the IP right is a registered trademark, copyright or patent, the US industry requirement has been expanded to not only include significant US investment in plant and equipment, labor or capital to substantial investment in the exploitation of the IP right, including engineering, research and development or licensing.  Recently, however, the ITC has raised the US industry requirement to make it harder for patent “trolls” or Non Practicing Entities to bring 337 cases.

Section 337 actions are fast, intense litigation in front of an administrative law judge (ALJ); The typical section 337 case takes only 12-15 months. Once a 337 petition is filed, the ITC has 30 days to determine whether or not to institute the case. After institution, the ITC will serve the complaint and notice of investigation on the respondents. Foreign respondents have 30 days to respond to the complaint; US respondents have only 20 days. If the importers or foreign respondents do not respond to the complaint, the ITC can find the companies in default and issue an exclusion order.

The ITC’s jurisdiction in 337 cases is “in rem,” which means it is over the product being imported into the US. This makes sense: the ITC has no power over the foreign companies themselves, but it does have power over the imports. What this means in everyday terms is that unlike most regular litigation, a Section 337 case can be effectively won against a Chinese company that 1) is impossible to serve, 2) fails to show up at the hearing, and 3) is impossible to collect any money from.

The remedy in section 337 cases is an exclusion order excluding the respondent’s infringing products from entering the United States. In special situations, however, where it is very easy to manufacture a product, the ITC can issue a general exclusion order against the World. In the Rubik’s Cube puzzle case, which was my case at the ITC, Ideal (the claimant) named over 400 Taiwan companies as respondents infringing its common law trademark. The ITC issued a General Exclusion Order in 1983 and it is still in force today, blocking Rubik’s Cube not made by Ideal from entering the United States. In addition to exclusion orders, the ITC can issue cease and desist orders prohibiting US importers from selling products in inventory that infringe the IP rights in question

Section 337 cases can also be privately settled, but the settlement agreement is subject to ITC review. We frequently work with our clients to settle 337 cases early to minimize their legal fees. In the early 1990s, RCA filed a section 337 case against TVs from China. The Chinese companies all quickly settled the case by signing a license agreement with RCA.

Respondents caught in section 337 cases often can modify their designs to avoid the IP right in question. John Deere brought a famous 337 case aimed at Chinese companies that painted their tractors green and yellow infringing John Deere’s trademark. Most of the Chinese respondents settled the case and painted their tractors different colors, such as blue and red.

Bottom Line: Section 337 cases are intense litigation before the ITC, and should be considered by U.S. companies as a tool for fighting against infringing products entering the United States. On the flip side, US importers and foreign respondents named in these cases should take them very seriously and respond quickly because exclusion orders can stay in place for years.

China attorneysTen years ago, our China lawyers probably wrote around one product sales agreement a year for our Western clients selling their products or services into China. These days with Chinese companies having become serious consumers of Western products and services, we probably write one a month. The below is an email from one of our China attorneys to a client, written to gather up sufficient information to create a first draft of a product sales agreement for the sale of a product from an American company to a host of Chinese automobile companies.

I am running this email (long after the fact and stripped of any identifiers) because it addresses many of the key points you should be thinking about if you are selling into China. The below email is to a client that was selling its products into China, but much of the email is relevant to those selling products into China as well.

Please find below an outline of a PRC product sales agreement with questions designed to provide me with the information required to draft the document.

The first step for drafting a sales agreement for China is to deal with the basic sales terms. The terms for customization and cooperative design can come later. For this reason, the outline and questions below apply only to sales of your_____________ product [customized for each buyer] and your other standard product from your China catalogue. Please consider the questions below and provide answers where you can. I will draft a sales agreement based on your answers. Where you do not have an answer, I will either a) insert a standard provision or b) provide for resolution by a separate document.

If you have questions or need further clarification about any of these items, please email me or arrange for a phone conference.

  • Product. How do you identify the Product? Do you simply use a catalogue part number? Or do you provide specifications? Or do you use some combination of these two? For __________, do you do any customization of the product, or are all sales straight from your line?
  • Price terms. How do you work with prices? Are your prices based on your catalogue price, or do they vary for each of your Chinese customers? How do you deal with price changes? That is, for how long are your prices effective? Do you have the right to raise prices at any time?
  • Payment terms. What are your standard payment terms? Do you require an upfront deposit? When is payment due and upon submission of what documents? How do you typically respond when a Chinese customer requests a variation from your normal terms?
  • Shipping Terms. What are your standard shipping terms? Does your pricing include freight, insurance and similar? Do you use a standard shipping term such as Ex Works or FOB or DDP?
  • P.O. Processing and acceptance procedures. How do you work with purchase orders? How many days do you allow for processing and acceptance? What happens when you do not formally accept a purchase order in writing? Without acceptance, is the PO considered to have been rejected? Are you required to accept all purchase orders submitted, or do you have the right to reject POs?  If you have the right to reject a purchase order, are there limitations to this right, and if so, what are they?
  • Scheduling and Timing. How do you deal with scheduling regarding timing and quantity of shipments? In our experience, some China buyers do not want to be tied down to any sort of schedule, while others want to tightly schedule both quantity and time of delivery. Still others want to treat their arrangement as a “requirements contract,” meaning they are not obligated to purchase anything from you, but you are obligated to fill all of their orders, no matter how unreasonable in terms of quantity or timing.
  • Facility, subcontractors and component suppliers. Do your China buyers have the right to inspect your manufacturing facility? Do they have the right to limit what manufacturing facility you can use for their products? Do they have any grounds for blocking you from using any subcontractors? Do they have the right to approve your component suppliers? Are they able to review and approve a bill of materials?
  • Packaging and labeling. Does your quoted price include packaging? What are your company specific policies concerning packaging and labeling of your products? How do you respond if a customer makes specific requests concerning packaging and labeling? Do you ever custom package and label? That is, do you ever package, label and mark using the name and logo of your China customer?
  • Molds and tooling. Are customer designed/customer owned molds and tooling used in your producing your_________ products? If yes, please describe.
  • Quality Control. How do you normally work with your China buyers in terms of quality control for your products? For example, do your buyers have the right conduct inspections and/or QC tests in your facility? How do you deal with special requests for quality control procedures from your customers. What form of testing or inspection do you use (if any) to confirm that your products conform to QC standards upon delivery to a customer? Are your buyers permitted to delay acceptance and payment for product until after they have conducted their own QC inspection and testing
  • Warranty. Do you have a standard warranty? If yes, please provide. If you do not have a standard warranty, PRC standard seller warranty terms for products similar to yours are generally as follows:

a. Seller warrants product will meet specifications for a period of one year from delivery to buyer.

b. Warranty remedy is as follows:

1.  For general warranty claims, remedy is limited to either a refund of the purchase price or the seller repairs or replaces the defective item at no cost to the buyer.

2.  If the defect rate exceeds 3% in any specific time period (Epidemic Failure), seller is additionally liable for the direct costs of dealing with the failure.

3. The seller is not liable for consequential damages of any kind.

Your buyers are likely going to want pretty much the “opposite” warranty; they will want you to be liable for all damages, direct or consequential, of any kind.

  • Warranty service. There are two types of warranty service:

a. For defects identified at the factory, before the product is incorporated into a manufactured item.

b.  For defects identified in the field, in a manufactured product that fails while in the possession of a third party purchaser.

What are your procedures for dealing with warranty claims in both situations? Note that for b), the most common approach is for the buyer to be responsible for dealing with the claim and for the seller to provide an appropriate reimbursement.

  • General service. What form of service/training do you provide in connection with the product? What service manuals or other written material do you provide in connection with the product? What other service do you provide in connection with the sale of the product?
  • Intellectual property. What registered intellectual property (if any) is used in the sale of the product: trademark, logo, design patent, utility patent? Will any buyer IP (such as buyer trademark and/or logo) be used with the product? Do you have proprietary (copyright) package designs that you will use? Will you use buyer package designs? Will you exchange any information with buyers that should be treated as confidential information by your buyers? Will you require the buyer to identify your product/trademark in the sale of their product? That is, when a special product like the _________ is used, it is sometimes required that the buyer identify that item in their description of their own product. For example, intel often requires this on computers sold in the U.S.
  • Dispute resolution. Since you are operating in China with Chinese entities, for dispute resolution we normally provide for litigation in the PRC People’s Court in the district where the defendant is located. Note that this particular client had a China WFOE through which it was making the bulk of its China sales. Many of our clients that sell their products or services into China do so from the United States or from Canada or from Australia or from Europe and our dispute resolution analysis for them might be very different. There is no one-size-fits-all dispute resolution clause.
  • Other special matters. If there are other matters you think we should be addressing for your products, please specify.

China LawyersThis is part three in a three-part series of posts on why foreign companies doing business in China so often lose their proprietary information (intellectual property) to their competitors in China. The first post focused on how so many of these losses arise from what we call leakage — the situation where the foreign company has a contract preventing its Chinese counter-party (usually the manufacturer) from using the foreign company’s proprietary information, but fails to prevent that information from leaking to third parties that are not bound by such a contract.

The second post focused on the most common forms of leakage our China lawyers see from companies doing business in China, particularly those that enter into manufacturing contracts with Chinese companies.

And this third and final post focuses on what you can and should do to prevent such leakage.

The first step to preventing your information from leaking in China is to have contract provisions written to prevent this. If your contract with your manufacturer does not cover the issue, you have little hope. This is why a contract is required and why a simple purchase order is virtually never adequate. But what sort of contract provisions are appropriate? The key is to deal with related parties (See Part 2 for a list of the riskiest related parties) by stating that all disclosures to related parties are prohibited and that your Chinese counter-party will be liable for all improper use of the information by a related party. That is, for related parties the approach is a simple matter of absolute prohibition.

In dealing with third parties other than related parties, the situation is more difficult. An absolute prohibition will not work. It is obvious that the manufacturer must disclose the key information to its employees. And in the modern manufacturing world, few factories are wholly self contained, so sharing of information is virtually always required as part of the manufacturing process.

There are two ways of dealing with the situation. The approach we previously took was to require the Chinese factory identify each individual and entity that would be a recipient of our foreign client’s confidential information. Our foreign client would then, in turn, enter into a separate NNN Agreement with each of these individuals or entities. Under this approach, the Chinese factory would be liable only for damages caused to our foreign client that arose from disclosures to persons or entities the Chinese factory never identified to us. But as China’s manufacturing practices evolved, and especially as Chinese factories began to manufacture increasingly complex products (such as Internet of Things devices) that required a whole slew of different companies this careful system has become less and less workable. The Chinese factory will seldom identify every involved party and those who have been identified are becoming increasingly unwilling to execute their own NNN agreements, and the fact that the factory ends up “off the hook” means that the factory becomes careless with information.

So our most common approach today is to provide that the factory can disclose information as necessary, but the factory is liable for all damage caused our client from misuse of the confidential information. If a key employee steals the information, the factory is liable. If a subcontractor steals the information, the factory is liable. If a mold manufacturer steals the information, the factory is liable. You get the idea. This approach allows the Chinese factory the flexibility to get its job done but it also provides it with a strong incentive for it to impose its own mechanisms for maintaining the confidentiality of the information provided to it by the foreign buyer. Chinese factories will often complain that loading the liability on them is unfair. The response to this should be that “if you cannot trust the persons to whom you disclose our information, you should not make the disclosure. Our record in getting these sorts of agreements signed is shockingly good.

When you manufacture in China, your goal must be to stop leaks of your information. This is not an easy job, but it is doable.

China employment lawGone are the days when China allowed pretty much any foreigner to work in China, with or without the proper visa. Foreigners may be employed in China only if all of the following conditions are met:

  1. The candidate is in good health and over the age of 18;
  2. The candidate possesses the skills and work experience required for the job;
  3. The candidate has no criminal record;
  4. The candidate has a specified employer;
  5. The candidate holds a valid passport or any other valid travel document in lieu of passport.

Where we often see foreign companies get into trouble is when they fail to meet applicable local requirements. Like pretty much everything related to employment law in China, the rules for hiring foreigners varies by locale. See China Employment Law: Local and Not So Simple. For example, some municipalities impose an upper limit on the candidate’s age. Beijing, for instance, requires the candidate be less than 60 years old (subject to certain exceptions). Some cities, such as both Shanghai and Beijing, require that foreign candidates have a certain number of years of work experience relevant to the job they will be taking in China.

China companies seeking to legally employ a foreigner generally need to complete the following steps. First, you will need to obtain an employment license with the local labor authorities for the foreign employee and then you will need to apply to the relevant foreign affairs office for a work visa invitation confirmation letter. The employee will then need to take that letter and apply for a work visa at the Chinese embassy in his or her home country. Upon arrival in China, the foreign employee needs to obtain (1) an alien employment permit from the relevant labor bureau and (2) an alien residence permit from the relevant public security department. Note that these permits need to be updated periodically.

A couple of cities recently promulgated new policies to encourage talented foreign citizens to establish permanent residence in China and to streamline the application and renewal process. Beijing issued new policies to attract senior level foreign talents, foreign nationals of Chinese ethnicity returning to China after studying abroad, foreign students, and foreign members of entrepreneur teams. This new program is starting in the Zhongguancun area — a technology hub in Beijing known as “China’s Silicon Valley.” Among other things, the new policies for the first time permit foreign students to do short-term internships in Zhongguancun and allow foreign students enrolled in universities in Beijing to start their own businesses. Certain foreign talents, such as those who are members of an entrepreneur team in Zhongguancun, will be able to obtain long-term residence permits and entry visas.

Now back to the “old” rules. Under the old rules (which are still the rules virtually everywhere in China) require China employers to have written employment contracts with their foreign employees and no matter how many “foreign elements” in that contract, it still must comply with national and local labor laws and requirements. Note that expat compensation packages with the parent company outside China will almost never be deemed a compliant employment contract for China’s labor law purposes. Foreign employees in China are generally entitled to the same benefits and protection as Chinese employees, including vacation and rest time and overtime pay.

I will write more about foreign employees’ benefits in a future post.

China imports
The U.S. Government has been cracking the whip on products transshipped from China.

Chinese companies and the U.S. importers of their products often tell me that they are not concerned about U.S. Antidumping (“AD”) and Countervailing Duty (“CVD”) orders because they can “just get around those orders by transshipping the products to Malaysia, Vietnam, Philippines, Sri Lanka, India, [or some other country] before sending them on to the United States.” Their plan is to relabel the products with a new country of origin and then export the products to the US free of AD and CVD duties, without US Customs and Border Protection (“CBP”) ever being the wiser.

Wrong.

Not only has CBP become expert at discovering such evasions, but the penalties — both civil and criminal — when caught have become very harsh. Importers that knowingly falsely label the country of origin on their imports are subject to significant fines and penalties under 19 USC 1592 and to criminal prosecution under 18 USC 542 (import by using false statement) and 18 USC 545 (smuggling). Lying about a product’s country of origin can subject you to 20 years in Federal prison.

Immigration and Customs Enforcement (“ICE”) has conducted criminal investigations against a number of products under AD and CVD orders, including honey, saccharin, citric acid, lined paper products, pasta, polyethylene bags, shrimp, catfish, crayfish, garlic, steel, magnesium, pencils, wooden bedroom furniture, wire clothing hangers, ball bearings and nails. Many of these investigations have led to criminal convictions and large fines and penalties. U.S. importers have also been prosecuted and sentenced to prison for bringing in Chinese products, such as honey, garlic, wooden bedroom furniture and wire clothing hangers, by means of false Country of Origin statements so as to evade US AD and CVD orders.

Many Chinese companies do not realize that U.S. Customs laws can be used to go after not only US importers that have filed the false documents at Customs, but also after Chinese companies and anyone from those companies involved in setting up the transshipment. In one case, a Chinese seafood executive was arrested at a seafood show in Belgium based on a US extradition warrant for evasion of a US AD order He ended up spending six months in a Belgian prison.

United States CBP, ICE and the Justice Department can be very tough investigators and prosecutors.

The real hammer against evasion of US AD and CVD orders, however, is the False Claims Act (“FCA”).  The FCA ( 31 U.S.C. § 3729) allows people or companies, designated a “Relator”, to file what are termed “qui tam” lawsuits against individuals or companies that directly or indirectly defrauded the Federal government.  Through qui tam lawsuits, the informants or “whistleblowers” may recover triple damages on the government’s behalf. Anyone who knows of the fraud, including a competitor company may file a qui tam lawsuit. And they do.

Relators file these qui tam actions to attack competitors and to get 15 to 30 percent of the triple damages the U.S. Government can recover from the lawsuit. Your competitors and your importers and your own employees are the most likely to initiate a qui tam lawsuit against you, but sometimes it is just someone who learned of what you are doing. Because the person or company that brings such an action can be awarded millions and even tens of millions of dollars, the incentive to file is huge. If you want to get a better idea of just how lucrative these lawsuits can be, do a Google search for lawyers looking to take on qui tam lawsuits.

The qui tam relator’s lawsuit is filed confidentially and is not served on the defendants, but on the US Government. The US Government then determines whether to intervene and pursue the action or settle the matter with the defendant. If the U.S. Government intervenes, it takes on primary responsibility for the case. If the U.S. Government decides not to intervene, the relator may dismiss the lawsuit or pursue the lawsuit on its own.

Under the False Claims Act, relators and the government can look backward as much as ten years after the date on which the violation was committed. When looking at imports over 10 years subject to antidumping orders with potential rates of over 300%, the amounts being evaded are usually enormous. In one False Claims Act we handled, the antidumping duties evaded were over $80 million. When those duties were tripled, and additional penalty sums were added for false statements and attorneys’ fees, the complaint against numerous importers exceeded $300 million. Our original complaint has resulted in an ongoing penalty action for $80 million against one U.S. importer, with the relator entitled potentially to $12 to $24 million of this sum.

With increasing opportunities to collect such massive sums, both the U.S. Government and private companies and individuals have huge incentives to bring more False Claims Act cases against those who transship and seek to evade U.S. antidumping and countervailing duties. If you are exporting to the United States or importing into the United States, you need to be wary of the hammer against transshipment—the False Claims Act.

 

Tuition scam
Don’t fall victim to this tuition scam. Please, please, please.

There is a new fraud scheme out there that preys on the Chinese belief that the connected get discounts to pretty much everything. Here’s how it works:

1. Fraud ringleader, believed to be based in China, signs up 4-5 commissioned “salespeople” to solicit money via WeChat from their fellow university students.

2. These salespeople convince the students that they can get them a five percent discount on their tuition and on their utilities. If a student’s tuition bill is 10,000, they merely pay these salespeople 9,500 and these salespeople will, in turn, pay the tuition in full. The same deal holds for utilities. In fact, students skeptical of this scheme often prove its validity to themselves by starting out with just the utilities.

3. My strong sense is that none of the students (including the salespeople) had any clue that they were helping to perpetuate what is looking like a fraud.

4. Our free advice to the students (and to anyone who reads this) has been as follows:

a. If you took any money from your fellow students (whether for a commission or not), you should seek out a criminal lawyer. If anyone in Seattle emails me, I will give them the name of the criminal lawyer to whom I have referred others.

b. If you are contacted by the police. Please, please, please tell them the truth. If you are thinking of going to the police, do not go unless you are going to tell them the entire truth and nothing but the truth. Again though, consider retaining a criminal lawyer.

c. If it sounds too good to be true, it is. Most Americans are going to have a really hard time believing that you thought it possible to get a discount on your tuition from a high end and 100% legitimate university or on your utilities, so if this thing really blows up and you need an expert witness to discuss how this was viewed as possible by so many Chinese students who had no intention of stealing anyone’s money, we have China lawyers who can explain this, even by using examples.

One of my favorites is that of a Chinese relative of one of our China lawyers who was looking for an immigration lawyer to gain U.S. citizenship. Our lawyer recommended an excellent local immigration lawyer who explained exactly how she would handle the relative’s case and how much she would charge. I believe it was around $10,000. But the Chinese relative thought this lawyer naive because he had spoken to another lawyer who for $25,000 was claiming to be able to “use his connections to get things done” and to “cut the lines” and strongly implying that only suckers do things the right way. Despite near begging from our lawyer to use the legitimate immigration lawyer, the Chinese relative (probably believing either that his own relative was getting a cut from the $10,000 lawyer or was also hopelessly naive) went with the $25,000 lawyer. To make a long story short, he is now permanently barred from coming to the US and that has been so for at least a decade. Why would someone pay so much more to do things the wrong way? Because only the naive and total suckers follow the rules.

d. Those who solicited funds from others are probably not criminally liable because they lack the mens rea necessary to be convicted of a theft crime. But they very well may be civilly liable and if sued may need to cough up all that they were paid by others, even though they passed on the funds to the kingpin or kingpins. Not surprisingly, there is no paper trail for at least some of these transactions, which will make proof very interesting.

I feel terrible that college students have to deal with this sort of thing to the distraction of their studies and we are doing what we can (for free) to assist. I just hope that these students and others who read this think twice when confronted with a scheme like this in the future. I’m guessing this scheme will spread soon to other universities, if it hasn’t already.

I have two kids, one still in college and one a relatively recent college graduate so I totally sympathize with these kids, far from home, just trying to do what they see as best. Please share the word so as to reduce the number of future victims. Any other ideas?

The Seattle Times has a story on this fraud and of how widespread it truly is.

Enforcing a judgment in ChinaAt least once a month, one of our China lawyers will get a call or an email from a U.S. lawyer seeking our help in taking a U.S. judgment (usually a default judgment) to China to enforce. The thinking of the U.S. lawyer is that all we need do is go to a China court and ask it to convert the U.S. judgment into a Chinese judgment and then send out the Chinese equivalent of a sheriff to the Chinese company and start seizing its assets until it pays.

As we have consistently written, nope, nope, nope:

But every once in a while, one of our China attorneys will get paid to conduct the research proving this on behalf of a U.S. plaintiff in a lawsuit that wants to be able to show a court that it should be entitled to collect all of its damages from a US-based defendant because it will never be able to collect anything from any potential Chinese defendant. The below is a less legalistic summary of our most recent research on this.

 

Article 282 of the PRC Civil Procedure Law, requires all of the following conditions be met for enforcement of a foreign judgment to be recognized in China:

  • The foreign judgment has taken legal effect in the jurisdiction in which it was rendered.
  • The country where the deciding court is located has a treaty with China or is a signatory to an international treaty to which China is also a signatory or there is reciprocity between the countries.
  • The foreign judgment does not violate any basic principles of Chinese law, national sovereignty, security, or social public interest.

Though China is a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, it is not a signatory to any international treaty on the recognition and enforcement of foreign court judgments. There is no bilateral treaty between China and the U.S. on recognition and enforcement of foreign court judgments. There also is no bilateral treaty between the two countries on civil or commercial judicial assistance.

Even judgments from countries that have an enforcement treaty with China, are oftentimes not enforced in China. For example, China and Australia entered into an agreement on reciprocal encouragement and protection of investments in 1988 that mandates both countries promulgate laws recognizing and enforcing each other’s judgments. But in response to a 2007 request by the Guangdong Province High People’s Court for instructions regarding an application by an Australian plaintiff for recognition and enforcement of an Australian court judgment, the Supreme People’s Court of China (the “SPC”) rejected enforcement since there was no international treaty to which China was a signatory nor any treaty between China and Australia on mutual recognition and enforcement of court judgments, nor any reciprocity between the two countries, the application should be rejected.

Since China is not a signatory to any international treaty on recognition and enforcement of foreign court judgments nor is there any treaty between China and the U.S. regarding judgment enforcement, the only possible way to get a U.S. judgment enforced in China would be if there were reciprocity between the two countries, but there isn’t.

In considering the question of reciprocity, a Chinese court will consider whether there is any precedent indicating reciprocity. In other words, the court will seek to determine whether there are any prior cases where a U.S. court recognized or enforced a Chinese court’s decision. If there are no examples of a U.S. court having enforced a Chinese judgment, the Chinese court will almost certainly rule against enforcing the U.S. judgment because the reciprocity requirement will not have been met.

In 1994, the Dalian Intermediate People’s Court considered a Japanese party’s application to recognize and enforce a Japanese judgment and two rulings. The application was eventually referred to the SPC for guidance and the SPC held that given that there was no multilateral or bilateral treaty governing such matters between China and Japan and given that the two countries had not established reciprocity, the Japanese judgment would not be recognized or enforced by a Chinese court. This case confirms China requires factual reciprocity, not presumed reciprocity.

But are there any examples of a U.S. court enforcing a Chinese Judgment? On August 12, 2009, the United States District Court for the Central District of California issued a judgment enforcing a $6.5 million dollar Chinese judgment against an American corporate defendant under California’s version of the Uniform Foreign Money Judgments Recognition Act and in 2011, the Ninth Circuit Court of Appeals affirmed the district court’s decision. The plaintiffs in that case were Hubei Gezhouba Sanlian Industrial Co. Ltd. and Hubei Pinghu Cruise Co. Ltd., two PRC companies located in Hubei Province. The plaintiffs won a judgment against Robinson Helicopter Company Inc., a California corporation, at the Higher People’s Court of Hubei Province. The United States District Court for the Central District of California held that the PRC judgment was final, conclusive and enforceable under PRC laws and the plaintiffs were therefore entitled to an issuance of a domestic judgment in the amount of the PRC judgment.

This was the first time a U.S. Court recognized and enforced a PRC judgment, but it does not necessarily mean a Chinese court will automatically invoke the principle of reciprocity and recognize and enforce a U.S. court judgment. First, the enforcing court in that case is in California (though it was federal court), and the laws usually differ from state to state in the U.S., so it’s uncertain whether a Chinese court will deem the U.S., as a country, to have established a reciprocal relationship with China. Second, since the enforcing court was a federal court, it’s also not clear whether a Chinese court will deem a state court’s judgment enforceable in China. Third, the enforcing court is not the U.S. Supreme Court, thus, a Chinese court may not deem it to amount to reciprocity at the highest judicial level between the two countries. Finally, that case involved a U.S. defendant who had previously argued that only China had jurisdiction over the case, so it hardly could be deemed unfair for a U.S. court to rule on enforcing the Chinese judgment.

Chinese courts tend to be more willing to recognize and enforce foreign divorce judgments involving Chinese citizens so they don’t have to initiate a separate divorce proceeding. However, since this is not a divorce case, it almost certainly is not relevant.

We have not been able to find a single instance where a Chinese court enforced a U.S. non-divorce judgment.

This memorandum does not address the possibility of your suing the Chinese company directly in China and there are times where doing so makes sense.

In conclusion, a U.S. court judgment against ______________ will almost certainly not be recognized or enforced in China. Unless ___________ has assets in the U.S. or in some country other than China that enforces US judgments, a US judgment will probably not be collectable against this company in any way.

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

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

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

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

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

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

And this happens constantly.

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

 

Importer of Record
Don’t get crushed when you import

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

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

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

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

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

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

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

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

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

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

China employment contract

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

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

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

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

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

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

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

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

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