China Law Blog

The Wall Street Journals' China Blog just did a post on China's current visa situation, entitled, "Visa Saga." The gist of it is that securing F-visas and tourist visas has gotten much more difficult and that multiple entry visas are becoming nearly extinct and the "prospects of the government easing the rules are slim."

The post chronicles the story of "Randy, a Shenzhen-based American expatriate who says he has been living in China for the past six years and is now being “forced out:”

Randy says he brought a properly signed and chopped invitation letter, only to be given another list of eight documents he would need to supply. Even if he had all eight documents, he reports being told, the visa notification letter would be issued only “in cases of extreme circumstances,” and that he should hope for no more than a double-entry, 60-day visa. The visa officer said “no more multi-entry business visas are being issued,” Randy says.

The kicker: Randy says the visa officer told him that if he wanted to continue living in China, he would have to find a large Chinese company willing to sponsor him for a Z-class working visa–or marry a Chinese woman.

“I’ve concluded that for all practical purposes, the F-class business visa is effectually dead,” Randy says. “I’d say the situation has become very nervous here for foreigners passing into China these days.”

This all corresponds with what we have been saying about how the only good visa these days for businesses with a real China presence is a Z-visa.

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Andrew Hupert at ChinaSolved did a post, entitled, "WOFE Managers & the Law: Know ‘em, Live ‘em, Love ‘em," on a speech by Tim Lamb on WFOEs (Wholly Foreign Owned Entities, a/k/a Wholly Owned Foreign Entities) and on complying with Chinese law. Andrew's Cliff Notes version is "follow the law":

Tim spoke for a while and covered a lot of important topics, but I’ll break down the main idea for you right now: China has a comprehensive body of business law, and if you break those laws you stand a very good chance of having a very bad time.

What about your old-hand friends who tell those hilarious stories about making buckets of cash without filing a form or leaving a corner uncut? Talk to them when it’s time to sell, move or cash out. Those stories tend to be a lot less amusing.

Tim/Andrew are absolutely right. More particularly, Tim had the following to say:

1) Not everyone breaks the rules. In fact, if you are a foreign business in China, you are going to be scrutinized by a wide range of governments, bureaucracies and regulators who all hope to catch you doing something illegal. Those fines, penalties and overdue fees show up on their P&L statements, so good luck trying to squirm your way out of them. Oh — and if you are still having your receptionist negotiate with government officials, you may want to consider raising your game a little and investing in a relationship with a qualified lawyer, accountant or consultant.

2) It’s your responsibility to know the laws. If it is going to take 6 months to set up your WOFE or move the HQ from Beijing to Shanghai, then that is YOUR problem – not China’s. You can’t win in court by claiming ignorance. You can’t claim that the contract shouldn’t be binding because you can’t read Chinese. You can’t say you didn’t know you needed permission or approval to do business here. Those days, unfortunately, seem to be over.

3) China’s new HR rules cover western companies AND WESTERN EMPLOYEES in China. Yes, that’s right – all of your expat managers need contracts must receive some form of benefits, pay taxes and everything else listed in the new HR law. Will your Senior VP of Marketing who earns $150 k per year sue you for a badly worded contract? Probably not. Will the pissed-off salesman with the Chinese wife sue when you fire him for non-performance? Hmmm. Better make sure your paperwork’s all in order.

4) You have to spend your registered capital within a set period of time. Yes, I know how clever you felt when you started your WOFE and banked 75% of the required capital. That was great. Now invest the funds or plan on explaining to some VERY humorless bureaucrats why you didn’t. It won’t be a problem, unless you plan on expanding, moving, selling or getting audited by the government (which should be happening every year).

5) You need government permission to move, expand, open new branches or make significant changes to your business plan. Furthermore, if you want to dissolve your WOFE or rep office, you had best follow official procedures (which sound quite involved and time-consuming) if you ever plan on doing business in China again. China loves paperwork.

I agree with all of the above, but would add that doing things right early makes it much cheaper and easier than starting off incorrectly and then having to clean up.

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By Andrew Grieve and Steve Dickinson (Andrew is a paralegal with Harris & Moure who is fluent in written and spoken Mandarin).

The Labor Contract Law continues to generate much controversy in China. As is typical of Chinese statutes, the law is unclear on many key issues. The usual way such ambiguities are resolved is through implementing regulations. On May 8, 2008, the PRC State Council issued a comment draft [in Chinese] of proposed Labor Contract Law Implementation Regulations.

Unfortunately, the proposed draft likely will not resolve important issues arising from the law, as they are short and mostly confined to simply repeating what is already stated in the law. This is unusual, since omplementing regulations tend to be longer than the laws that generate them. In a form of wish fulfillment, some commentators from Hong Kong have seen the draft regulations as an attempt to weaken the law. We do not view them this way. Other commentators within China have seen the regulations as an attempt to make the law even stricter. We also disagree with that view.

The reality is that the comment draft implementing regulations leave us pretty much where we started. Foreign companies operating in China need to continue focusing on dealing with the law as drafted.

The comment draft implementing regulations do clarify a couple of points that may have been ambiguous in the original law.

Probably most importantly, the regulations state that an open term contract comes into play once an employee has completed two fixed term contracts and the employer continues the labor relationship, or if the employee has been working for at least 10 years with the current employer. Only if the employee explicitly states that he or she wishes to enter into a new fixed term contract can this be avoided.

The new draft has some interesting things to say in this regard:

When seeking to determine whether an employee has been working for a full ten years, the draft regulations state that an employee's time with the old employer will be added to the employment period with the new employment if the worker's reason for having moved to the new employer was due to corporate plans or administrative decisions. This is clearly an attempt to prevent employers with multiple companies from using those companies to move employees around just before they would be eligible for the unfixed term contract.

At the end of the term of a fixed term labor contract, should there be a provision for automatic renewal and the employee continues to work, or if there is no provision, but the company makes no compensatory payment and does not complete the process for the termination of employment, the draft views this as a natural extension of the labor contract for a further fixed period of the initial contract. If this would make the employee eligible for an unfixed term contract, then unless the employee specifies otherwise, the contract is deemed to be on an unfixed term.

If a worker under one of the following circumstances has been employed for 10 full years and wishes to enter into an unfixed period contract, the employer is required to do so:

1) having been exposed to dangerous conditions and not having had a health check before leaving the position, or during the diagnosis or medical examination of a suspected occupational disease;

2) during the recovery period for a non-work related injury or illness

3) female workers during pregnancy, giving birth or breastfeeding.

This is an awkwardly written provision that grants an employee the right to an unfixed term contract by the simple accident of illness or pregnancy.

Under the law, termination of labor contracts can only be done under specific and narrowly defined set of circumstances. Since many companies have been trying to get around these requirements by building additional clauses into contracts specifying specific conditions for the termination of the contract, the draft also provides that:

Contracts cannot include termination clauses that fall outside of the scope of the labor contract law, additional responsibilities for breach, or other labor regulations (for example company regulations) that do not fall within the scope of the labor contract law.

The draft regulations also now restrict an employer's ability to levy fines or penalties against an employee to the following employee acts:

1) Serious violation of company rules and regulations
2) Serious dereliction of duty, embezzlement, damaging the interests of the employer
3) Entering into an employment agreement with a third party that affects the completion of tasks and refusal to remedy the situation
4) Entering into the labor contract under false premises or through intimidation
5) Being subject to criminal investigation.

This list is also found in the Labor Contract Law, so the draft essentially just clarifies that these are the only acceptable conditions and that no additional penalties may be incorporated into contracts.

Quite often, migrant workers do not want to sign written contracts, especially if they believe they will want to change jobs relatively quickly and/or go home and not come back during the Chinese New Year holiday. The draft regulations allow employers to protect themselves by terminating a labor relationship within one month of its commencement if the employee refuses to sign a written contract, without having to pay any compensation. Between this first month and the first year of employment, if no contract has been signed, and the employee still refuses to sign a contract, the employer may terminate the labor relationship, but is required to pay compensation on the basis of one month's wages for each full year of employment. It is still necessary to pay twice the monthly wage for each month of employment without a written contract, but the company now is able to terminate the relationship with the employee.

So while the new regulations do provide some clarifications, these are mostly aimed at closing loopholes and preventing companies from working around the Labor Contract Law. There is no substantially new content, and since the regulations are in draft, it is likely that some of the more inflexible measures, such as unfixed term contracts for sick or pregnant workers may see some challenge. The end result, however, is that employers must still plan to get in compliance with existing PRC labor law, including the Labor Contract Law. There is absolutely no indication that the Chinese government plans to back off from or weaken the provisions of that law. If anything, the current trend seems to be to move in an even more strict direction favorable to the worker.

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When growing up, I played basketball 2-7 hours a day, year round. That meant a lot of basketball shoes. The shoes were everything. The shoes told people how you thought of yourself and they influenced how others thought of you.

Like everyone else of my era, I started out with Converse All Stars because I had no choice. They were crap but until better came out, we just didn't know.

The first "modern" basketball shoe was the Adidas Superstar. I think they cost thirty dollars, which my parents thought was absolutely insane, compared to the $9.95 I was paying for my Cons down at Okun Brothers. But I had to have those shoes. Is there anyone out there who does not associate Kareem with these shoes?

At some point thereafter came my
John "Hondo" Havlicek phase, which meant having to special order really ugly green suede (were they suede or were they leather?) Adidas. This told everyone that I may be White, but I can play. While wearing those shoes, great plays on my part would sometimes evoke other players to call me "Hondo." Yes!

There was also for some short period my Walt "Clyde" Frazier era, which meant moderately ugly (and too wide for my feet -- okay mom, I'm finally admitting it now) Puma Clydes. Great plays on my part led to other players remarking that I was "Clyding." This told everyone that my ambitions extended beyond Kalamazoo. I was urban and urbane now.

There was my very short Pro-Keds period. Purple suede, I believe. Are you messin' with me, or are you messin' with Tiny Archibald? Totally cool shoes, totally cool image, but, when you got right down to it, they were lousy shoes. Oh well.

And there was also my Iceman phase, which meant Nikes. Did I just nail that 25 footer with someone three inches taller than me draped all over than me? No big deal.

So the thought of anyone messing with any of these classics would draw my ire.

And apparently, I am not the only one. According to the Seattle Trademark Blog, an Oregon Federal Court jury just found Payless Shoesource, Inc., liable for infringing Adidas America, Inc.’s three-stripe trademark and awarded Adidas $305 million. "The jury found Payless infringed or diluted Adidas’ mark or trade dress by using a two- and four-stripe logo on its competing athletic shoes. Trial lasted 14 days. The jury deliberated for two days." Here are the shoes the jury found were infringing:

Man, if Lot 3601 doesn't look just like my old Kareems, only with some mutant fourth stripe. Tort lawyers out there, can I bring a claim for post-adolesent traumatic shoe disorder? Are we talking class action? Should I be wary of allowing my childhood friend, Jeff Lane, to join in for fear that Payless will be able to prove that because he was never any good at hoops, there are no reputational damages? Same with John DiDominic.

In your face Payless, thinking you might be able to confuse people into thinking I once wore your shoes when I was always way too cool for that. Payless. Damn. That would have been an abomination. No Payless here.

So what's the China angle? Well it is a bit tenuous, but this ought to remind you that trademark infringement can occur anywhere, not just in China, but if you want to know how to protect your trademark in China, read this article. And it ought to tell you that the shoes are everything.

Weird observation: Big difference between male and female basketball players when it comes to "the shoes." Boys see it as a compliment when some other player buys the same shoes. Female etiquette dictates securing permission before buying the same shoes, and, oftentimes, if possible, the request is tempered by a promise to get them in a different color.

Update: The tres chic Counterfeit Chic blog just did an interesting post on this same case, entitled, "Adidas v. Payless: 3 Stripes, You're Out."

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As regular CLB readers know, I have been repeatedly preaching (right word) for some time about the massive impacts to expect from China's new labor contract law, which went into effect just this year. My consistent theme has been that disgruntled employees represented by Chinese litigators ready to pounce will bring an ill wind to all employers in China. To read some of my previous posts on this, check out the following:

1. "China's New Labor Law -- It's A Huge Deal. Huge I Tell You." (November 11, 2007)

2. "China's New Labor Contract Law." (November 25, 2007)

3. "China's New Labor Law Gives SOME Employers The Jitters." (December 19, 2007)

4. "China's New Labor Law. Still Coming. Still A Big Deal." (December 28, 2007)

5. "China's New Labor Law: Compliance Comes Easy." (January 3, 2008)

6. "NPR On China's New Labor Law -- Low Tech Getting 'Difficult.'" (January 8, 2008)

7. "China Labor Law: What's Good For The Law Firm And What's Good For The Lamb." (March 6, 2008)

7. "China's New Labor Law Means Tenure For Everybody." (April 7, 2008)

And that is exactly what has occurred, but even faster and in even greater doses than I expected.

Stan Abrams, of China Hearsay fame, and one of his co-workers, Kevin Jones, of DLA Piper fame, just wrote an article on this for China CSR, entitled, "Year Of The Rat Brings A Plague Upon Employers In China."

The article starts out noting how despite lawyers having seen this coming, "implementation has been slow," "litigation has picked up markedly" and "China's new Employment Contract Law continues to pose huge problems for employers." It need not be so bleak:

Employers who have been non-compliant in the past will be hit the hardest by the new law. But is the outlook really that bleak for all employers? The answer is no, not necessarily - for employers who have been largely in compliance with the 1995 Labor Law (which is supplemented, not replaced by, the Employment Contract Law), and who implement proper administrative procedures to ensure continued compliance going forward, the pain will be bearable.

The new law "effectively eliminates" consecutive fixed-term employment contracts:

The Employment Contract Law limits fixed term contracts to two consecutive terms, after which an open term contract is required to be offered to an employee. However, it is unclear as to whether an employer has the option to simply let the second term expire without offering a new contract to the employee. Draft implementing rules will apparently address this issue; it appears that the new rules shall stipulate that an employer is obliged to provide an open term contract if so requested by the employee. This would effectively give employers only one fixed term opportunity to evaluate employees.

It is not clear when Beijing will issue the implementing rules but it is clear that "employers need to be more mindful of when employment contracts expire and need to properly evaluate the long term employability of employees during the initial term."

The article states that "extensive press coverage of the new law's employee-friendly provisions" has educated Chinese employees of their rights and led to "a significant increase in formal labor disputes." They also predict (and I concur) that the number of labor disputes will increase "even further once the new Labor Dispute Conciliation and Arbitration Law comes into effect in May of this year." The new dispute law will eliminate arbitration fees and extend from 60 days to 1 year the time by which employees must file their claims. For more on the dispute law, check out this post, entitled, "May Day Is Also New Law Day," on the WSJ China Journal.

Employers will still be able to terminate employees for violating written company rules, but the new Employment Contract Law sets forth certain procedures employers must follow for even this to be the case:

For company rules to be enforceable under the Employment Contract Law, the employer must (i) discuss and seek feedback on proposed company rules with all employees or an employee representative congress, (ii) conduct negotiations with the union or an employee representative; and (iii) publish the rules. This effectively empowers a union or employee representative to bargain with employers over salaries, bonuses, training and other work-related benefits and duties. However, as the law currently stands this does not mean that unions or employees have veto rights over any rules.

The authors conclude their article by rightly positing "that non-action is no longer an option."

Travis Hodgkins over at the Transnational Law Blog views the new labor law in a much brighter light as he sees it (rightly so, I might add) as further proof that China is evolving towards rule of law. To find out more about what Travis has to say on the labor law, check out his post, entitled, "A Reason to Have Faith in China's Legal System: The Labor Contract Law."

I would love to hear from employers (and employees) regarding their labor experiences since China's enactment of the new law.

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Though I got a bit of grief for saying it before, I will say it again, arbitration clauses fascinate me. As I said in a previous post on this topic, entitled, "So Ya Say You Wanna China Arbitration, Well You Know":

I can nearly always judge the legal thought that went into an agreement through its arbitration/litigation provision alone. I usually can instantly tell from just that one provision whether the contract was drafted by a lawyer or not, and if it was drafted by a lawyer, whether that lawyer knows international law. Mistakes in this critical provision are rampant. Huge mistakes.

In that post, I listed some of the arbitration/litigation clause mistakes I had seen recently and I have a brand new one to add to that list.

I got a call a few weeks back from a company wanting to discuss some of the things it could do with its OEM (Original Equipment Manufacturing) contract to protect itself from bad China product I mentioned that we typically put an arbitration provision in those contracts because it makes collecting damages easier. I also mentioned we also usually add a litigation "carve out to allow our clients to pursue injunctive relief in the China courts. I also mentioned the importance of non disclosure provisions in such contracts.

A few days later I get an email telling me that they are getting closer to needing the OEM Agreement, but in the meantime, they are talking with a potential new supplier and they had required this potential supplier to sign an NDA (Non Disclosure Agreement) in English, with a Hong Kong arbitration provision.

I quickly replied with the following email:

I hate to tell you this, but you made a huge mistake with your confidentiality/non-compete/non-circumvention agreements with your Chinese suppliers in asking for arbitration in HK. You do NOT want to arbitrate this sort of thing in HK because arbitrators (even in China) have no real power to force parties to do anything. All they can do is issue a monetary award. I hate to be so harsh, but your agreement is of almost no value at all. You need one in Chinese that provides for your ability to go to Court in China to enforce and maybe, (though we would have to know more to say) allows you to arbitrate in China for damages. The key in these situations is usually not damages; it is stopping the wrong-doing as soon as possible. The way you have set this up, even in a best case scenario, you will be arbitrating for about 8 months in Hong Kong and then spending another 4-5 months getting that award enforced in China before you can even think about asking the Chinese court to stop anyone from doing anything. In other words, you have put exactly what you want to accomplish in a deep freeze for about a year. You truly would be better off not having this agreement at all.

The BizCult blog is guilty of the same thing. In a post, entitled, "Foreign Arbitration: No Little Whitey Lie," the good folks over at BizCult write about co-blogger Steve Dickinson's talk on Chinese Joint Ventures (JVs) at JP Morgan's recently completed (and excellent) China Conference in Beijing. BizCult attributes to Steve the view that arbitration outside China is NOT advised in what sounds like every case:

Anyway, you remember Mr. Dickinson saying at J.P. Morgan’s China Conference 2008 (which ended just last week) NOT to rely on arbitration of disputes outside of China.

BizCult then goes on to cite (correctly) Steve's written materials from that conference on arbitration:

The next mistake foreign investors make when they lose the battle for control is to provide for arbitration of disputes outside of China. As with separate guarantees, many foreign investors will say that they are not worried about the fundamental problems with their joint venture structure because they have provided for arbitration of disputes in a neutral third country such as Sweden or France. This is also a mistake.

Arbitration or litigation outside of China is not likely to resolve any problems that result from fundamental issues related to management of the joint venture company. Arbitration outside of China is cumbersome and expensive, and is therefore not a really practical alternative. More important, when critical issues arise concerning the management of a Chinese joint venture, it is important that the foreign partner have a legal forum within China that will allow the foreign party to make its case in China. By taking action outside of China, the foreign partner actually makes it difficult or impossible directly to confront the issues in China with staff, media and the courts…. Many foreign investors insist on foreign arbitration because they are concerned about receiving fair treatment in the courts or arbitration panels in China. For the most part these concerns are misplaced. China now has reasonably capable and fair courts and arbitration panels.

I respond to BizCult by leaving the following comment:

Whoa, whoa, whoa. Choosing whether to have a foreign arbitration clause should definitely be made on a case by case basis. All Steve said at the JP Morgan conference was that foreign arbitration is not usually a good way to get control of your joint venture back. Generally, and I mean VERY GENERALLY, foreign arbitration is good for securing damages, but not so good for securing injunctive relief (getting someone to be ordered to do something. For example, foreign arbitration is not so good for getting a Chinese company to have to stop manufacturing your product, but it might be the best way to get that company to have to pay you damages for having engaged in that manufacturing. So in this example, the contract might call for foreign arbitration (where?) but have a “carve out” provision calling for litigation in China for injunctive relief. These things are hugely complicated and at least 9 out of 10 times it is done wrong by those putting in these provisions without lawyers. In fact, many years ago I spoke at an end of year Continuing Legal Education conference where about ten of us from different areas of law were given about 15 minutes to speak on one thing in our area of law that we thought it most important for all lawyers to know and I spoke on the uses and abuses of arbitration provisions in international contracts. I chose this topic because non international lawyers nearly always get it wrong too.

I cannot stress enough that the decision on whether to arbitrate, what to arbitrate, and where to arbitrate absolutely must be made on a case by case basis and it must be done by skilled and experienced legal counsel. The article, "Seven key points to consider when using arbitration provisions," says it best:

To the untrained negotiator, an arbitration provision may be legal "boilerplate," which means typical clauses that require little or no negotiation -- a throw-in type provision. The reality is that parties should carefully weigh the benefits and disadvantages of arbitration in every transaction . . . .

The decision to use or write an arbitration provision in commercial transactions should not be made with a mechanical "one-size-fits-all" approach. It is critical that transaction parties consult with their litigation lawyers, not just their transactional counsel, and take the long view of the business relationship at hand and how the parties are going to resolve disputes. To neglect to tailor a dispute resolution provision to your needs at the outset of a transaction may lead to unnecessary disadvantage, expense and distraction down the road.

To which I again say, Amen.

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The Australian has an article on China's just enacted Information Disclosure Act, entitled "Chinese FOI act tied by red tape." The purpose of this Act is to improve governance, not to grant citizens any sort of right to know:

Despite this, Dr Cheng [Cheng Jie is a constitutional law professor at Qinghua University in Beijing] believes the new disclosure regulation, promulgated by China's State Council, or cabinet, and eight years in the making, does mark incremental progress in accountability. The main application, she says, will be for individuals seeking information about issues such as compensation claims from theGovernment.

She says that it is not a concession to the right to know, which would require legislation by the National People's Congress or parliament.

It amounts, she says, to a concession instead to the need for better governance, and for more participation by individual citizens in the Government's decision-making processes.

Dr Cheng says it is in the nature of a "self-revelation" initiative from the Government, and that a non-government organisation or journalist pressing this button too hard risks imperilling their relationship with the Government.

These government disclosure requirements have been in effect since 2004 in Shanghai, Guangzhou and Wuhan as part of a pilot program and the article discusses how that pilot program has helped a bit, but certainly less than hoped. For those interested in issues of government disclosure in China, I urge you to read the full article.

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Chinese Law Prof has a post up on the two lawsuits (did I just hear of a third one out there) filed in China against CNN for Jack Cafferty's "thugs and goons" comment. The post is entitled, "CNN sued for Cafferty's 'thugs and goons' comment," and in it, Chinese Law Prof analyzes the merits of the claims under Chinese (some) and US law (none).

Here's my two cents. Cent One: I do not think any of these lawsuits will ever see the light of day. I think the Chinese courts will snuff them out for political reasons based on instructions from on high. The Chinese courts have a nasty tendency not to allow filing of lawsuits they do not like or, if they do allow the filing of the lawsuit, to not allow them to be docketed and move forward. With Beijing making obvious efforts to clamp down on rampant nationalism right now, I am convinced it will squash these lawsuits to avoid any potential bad international PR.

Cent Two: If CNN had any guts it would leap on these cases and fight them hard. It would counter-claim against the plaintiffs for seeking to violate its free speech rights in China (there are such rights) and really just get up into the plaintiffs' grills (that is a non-legal expression I learned while coaching high school this past summer). CNN's defense should be that Cafferty was NOT referring to China when he said this; he was referring to the party in power. CNN could then seek to introduce evidence supporting its accusations.

These are the sort of cases that make litigation fun.

Of course none of this is ever going to happen and I am quite certain nobody will remember these lawsuits six months from now. But if it did....

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Charlie McElwee of the China Environmental Law Blog did an interesting post analyzing a Xinhua article on increased enforcement of China's environmental laws and on Chinese companies' growing realization that going green means making more green.

Though Charles is an environmental lawyer based in Shanghai, unfortunately, he does not provide his own assessment on these issues. My own personal data base is not large enough to venture an opinion regarding enforcement of China's environmental laws, beyond stating that it is getting increasingly tough to secure Chinese government approval to form high polluting WFOEs (Wholly Foreign Owned Entities). I can also vouch for the fact that green marketing is on the rise in China and I have to presume this would not be the case unless money is being made by doing so. Certainly, this green marketing is more apparent in Shanghai and Beijing than in the second tier cities.

What are you seeing?

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Rich Brubaker over at All Roads Lead to China has a post up on how the Chinese government makes its laws with its own populace in mind, not out of consideration for foreign companies. The post is entitled, "Regulations in China: Are You Prepared? Are You Ready? Are You OK?" and here is its money quote:

There is and has been a sense of entitlement in the foreign community about their contribution to China, and its economy. that because of foreigners and foreign investment, everything that has happened in China.. that without foreigners this place would flush down the drain… etc. and even if true, that does not mean that they should just bend over to the interests of foreign parties.

They have 1.4 billion people to manage, and at all times that number will trump anything else offered.

Rich is absolutely correct and his point really ought to be obvious, but it is not. I am constantly hearing from foreign businesses complaining about this or that Chinese law and then stating that China just does not understand what its laws do to foreign business. Well, the Chinese government does understand, but foreign businesses (particularly those smaller than Intel, Caterpillar and Coca-Cola) are just not one of its chief priorities.

So, as Rich says in this post, if you are a foreign business in China, you must always keep your ears to the ground regarding upcoming laws that might affect your business. Unfortunately, sometimes this works and sometimes it does not, as there have definitely been times in China where laws or regulations have come out without any real warning.

China is not without its legal risks. For more on handling China's ever changing legal regime, check out China Law As Guessing Game.

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Got a worried call the other day from a China based foreign businessperson complaining about being forced to return to his home country because his China tourist visa was about to run out. Not only was he mad about being unable to renew his visa from within China or even by jumping over to Hong Kong, but he knew his chances of getting a new multiple entry visa were extremely low.

Our conversation from this point went something like this:

Him: I have a $5 million a year business to run in _______(Chinese city).

Me: I understand your concern.

Him: Doesn't China care about business any more? How can they expect me to run my business from ________(foreign city). There is no way that is going to work.

Me: Are you familiar with Z visas?

Him: Yes.

Me: Have you tried to secure a Z visa?

Him: No.

Me: Why not?

Him: I have only been in China for three years. When I first came in, things were different. We started out with only three Chinese employees. Back then, there were no laws in China. We have thought about setting up ourselves as a rep office. We really started looking into that l

Me: You cannot be a rep office with what you are doing. Not even close. But what you are saying then is that you do not really have a company in China at all.

Him: Yes I do. I just haven't registered it yet.

Me: Well, if you want anything approaching certainty regarding your visa, we are going to have to form a WFOE for you.

Him: Can you get that up and running within a month?

Me: No.

Him: Well then that is just not going to work.

Me: Do you have something in mind that will work?

Him: Not yet, but I will keep looking. I've been here for three years doing this and I just cannot believe that is just going to change like that.

Me: But wouldn't you agree that it already has?

Him: Maybe.

Me: If you end up going the WFOE route, please let me know.

This conversation is fairly typical as China continues cracking down hard on those in the country illegally and as it begins tightening its standards for receiving visas. The interesting thing about all this is that the foreigners who complain are almost always in China illegally or quasi-legally.

The Bottom Line: If it is important to your company that you be in China, your only real solution is to secure a Z visa for employees and the only way you can be an employee is to have a real, registered, Chinese company for which you are able to work. We are hearing that China is generally issuing only Z visas for more than 30 days and that all other visas are becoming increasingly difficult to secure. In other words, you must get legal and though that cannot be done instantly, delay only breeds more delay.

For the latest on what is happening in China with visas, check out the following:

1. "Bracing for Games, China Sets Rules That Complicate Life for Foreigners," in the New York Times.

2. "Visa Situation Goes from Bad to China Bad," on BizCult.

3. "Queue Up Now: China's Visa Nightmare," on the Huffington Post.

4. "As Olympics near, jittery China clamps down on foreigners, concerts," by McClatchy's Beijing Correspondent, Tim Johnson.

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Stan Abrams over at China Hearsay did a great post, detailing the difficulties of uncertainty in dealing with Chinese law. The post is entitled, "The Law and New Tech in China," but the issue it raises regarding the gaps in China's commercial laws goes well beyond just new technologies.

Stan starts out with the following fact pattern:

Company A makes nano-widgets in the U.S. and sells them in the U.S., EU and parts of Asia. They now wish to sell in China and would like to know if China permits foreign companies to sell nano-widgets in the PRC.

Company A calls me up and asks me to check this out. First, we take a look at the relevant laws and regulations. No surprise, there is no law in China regulating nano-widgets because the technology is so new.

Second, one of my associates calls over to the Ministry of Mysterious Technology (MMT) to find out what their policy is on this. The official at MMT says that he is aware of nano-widgets, and although the Ministry has yet to take a formal position on the issue via publishing a regulation, their internal policy is that foreigners may not sell nano-widgets in China.

Further research shows that two foreign companies are selling these products, one in Tianjin and the other in Shenzhen. I ask the MMT about the likelihood of administrative enforcement, and the official says that MMT will not take any action and is aware of what these companies are doing.

Stan than asks, "What do you tell Company A?" He then posits the following:

1. There is no law that says you cannot sell nano-widgets in China. Go for it.

2. China has no licensing scheme at the present time for the sale of nano-widgets, therefore Company A cannot secure a license to sell these products.

3. It is illegal for Company A to sell these products because the MMT says that it is prohibited.

4. Company A should go ahead with sales in China because even though there is an internal policy against it, the lack of enforcement implies a tacit acceptance by MMT in the absence of regulation.

5. Company A should sell more traditional products.

Stan has absolutely nailed it. My firm gets these issues all the time as well, and not just in the area of new technologies. Media and financial services are also areas of Chinese law ripe with gaps. So how do we usually handle these things?

These situations make for the classic lawyer CYA letter setting out all of the applicable facts and then stating that the law is silent on the issue. The letter concludes by stating that because the law is silent, one cannot predict what will happen (or when) if the client goes forward with its plan.

We have had to write a whole score of these letters, but because this is China, most of the time, our clients have gone forward despite the risks and unresolved issues our letters set forth. This is particularly true of our clients that are not publicly tradeed. The publicly traded ones more often back down, simply because they do not want to have to put something in their disclosure statements along the lines of, "our China operations may or may not be legal and therefore, they may be closed down at any time."

Our job as lawyers is to present the client with the facts on the ground and with the law. In the end, it is the client who must then incorporate those facts and law and make its own business decision on how to proceed. Indeed, we have a number of clients who have gone forward with businesses even after we have made very clear they are either illegal (an example might be an office building in a building that is required to be used as a hospital) or illegal for foreigners. That is their decision to make, not ours. Again, our job is simply to educate them to the risks.

It all comes down to that old business calculation of risk versus reward. Step right up.

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David Dayton of the always excellent Silk Road International Blog just did a post, entitled, "Show Questions," on some of the questions he was asked as a speaker at the Global Sources Buyers Show now going on in Hong Kong. My favorite interaction was the following:

Finally, I had a very nice conversation at the “Ask the Experts” Q&A Sessions yesterday with a rather worried new buyer. Basically he said: “I’ve made samples and placed two trial orders already with 4 different factories. I didn’t like the quality I got and I’m currently not working with any of them. But now I’m worried that they may be violating my IP.”

My response: “Don’t worry, they are. Your best case scenario now is to hope that they don’t’ file for trademark or patent registrations in China before you do.”

Remember China is a file first country so you’d better be the one that files first! That means file BEFORE you give your art to the factory

So true. Every month or so, someone calls my firm (usually just long enough after returning from their first trip to China for the glitter to have worn off), all of a sudden worried the design or prototype they were showing all over China might be copied by one of the factories to whom they will not be awarding their bid.

If these companies have a patentable product (and nine times out of ten they do not, either because their product is inherently not patentable or because it has been too long since they secured a patent on it outside China), I discuss with them their need to patent their product in China before someone else does. I do the same regarding their trademark, if that is applicable.

More commonly though, I just tell them that the next time they show their product or design in China, they should take over a Non Disclosure Agreement (NDA), preferably in Chinese.

Such advice is the legal industry's equivalent of "better luck next time."

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Visas have always bored me. Sorry about that, but they have. A law school education is rarely needed to figure out visa issues and I did not go to law school for that. I have always taken a rather perverse pride in not keeping up on visa requirements. Anywhere:

Client: Will I need a visa to come to the United States and, if so, what kind? Me: I dunno. Let me pass you off to the high school freshman who does our filing and we can have her figure this out and get back to you in 15 minutes.

Not that I have been immune to visa problems. Not that long ago, I was enroute to Qingdao via Seoul (and when I say enroute, I mean in the air half-way between the two places) when I put on my glasses and noticed for the first time that though the date on my visa was still plenty good, I had already maxed out on the number of visits. My sweet talking the Chinese customs guy did no good and I had to return to Seoul and spend the weekend chillin' at the Westin Chosun until the Chinese Embassy opened back up on Monday. Or the time I was held by the police in Vladivostok, Russia until 2:00 a.m. because I had failed to get a visa for that particular city.... Okay, so I agree visas matter, but they are still not very interesting.

Until now. China is cracking down on entries into China every which way it can, and it is doing so to such an extent that it is affecting business. It is impacting business because businesspeople are getting stuck in Hong Kong where they had gone to get visas to re-enter China and are now being told they must return to their "resident country" to get any such visas. It is impacting businesses because companies that were hoping to delay having to form Chinese entities to do business in China are now having to register a WFOE or Representative Office to ensure their people have a basis for coming into China -- another case of lawyers' benefitting from others' bad fortune. And it is impacting business because it is creating massive uncertainties.

Rather than my having to deign to explain what is going on, I am just going to link you over to the newly (and timely) formed China Visa Blog, which is valiantly trying to keep up with the constant changes in China's visa situation. Note how 95% of this blog's readers, as per its poll on the left side of its site, are not happy with China's recent visa changes.

Me? Thanks for asking. I have a one year multiple entry visa, secured just in time to skirt this mess.

Would love to hear any and all China visa stories in the comments below. Let's try to build up a "database" regarding what is going on with China's now ever-changing visa situation, with you-all doing the grunt work.

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Until a couple of months ago, co-blogger Steve Dickinson was the legal columnist for one of China's most prominent English language business publications. As part of his regular monthly gig, Steve submitted an article on how to avoid joint venture mistakes. The censors rejected it and I assume they did so because it might be detrimental to Chinese companies seeking joint ventures.

AmCham Beijing did not have such constraints and it just published the article in its China Brief publication, entitled, "Avoiding Mistakes in Chinese Joint Ventures."[pdf] It provides a roadmap for avoiding the mistakes that have given Chinese joint ventures such a bad name.

The article starts out by noting that with "the exception of some market sectors, China is remarkably open to foreign investment, and in the past several years WFOEs [Wholly Foreign Owned Entities] have become the most common vehicle for foreign investment, partly due to investor skittishness as stories about past problems with Chinese EJV [Equity Joint Venture] partners made the rounds.

The article notes how "thoroughly vetting your joint venture partner" will "dramatically increase your likelihood of success," but states that most China joint ventures fail because the foreign partner made the "fundamental mistake" of believing its 51% ownership gave it effective control over the joint venture:

Foreign investors too often assume that a Chinese joint venture company is managed according to a common Western model, under which a board of directors has controlling power over the company. Since the board is elected by a majority vote of company owners, most foreign investors will strive to obtain a 51% ownership interest in the EJV. As majority owner, the investor then assumes he has the right to elect the entire board, and thus effectively control the company.

After winning the struggle for percentage ownership, as a concession, the foreign investor will frequently allow the local side to appoint the representative director and the company general manager. Unintentionally, this concession cedes effective power. As a result, the investor’s struggle for board control is rendered meaningless. Frequently the Chinese side intentionally angles to ensure this outcome. We know of cases where an EJV partner concedes on the percentage ownership issue in return for control over the two key management positions in the company.

In order to exercise effective control over a joint venture in China, investors must avoid this mistake. It is necessary to have control over the day-to-day management of the joint venture company.

The article then sets out the following basics for maintaining control over your Chinese Joint Venture:

● The power to appoint and remove the JV’s representative. The side that appoints the representative director will have significant control over operations. The usual practice of conceding the power to appoint a key officer or director to another investor is a mistake.

● The power to appoint and remove the general manager of the joint venture company. It must be made clear that the general manager is an employee of the joint venture company who is employed entirely at the discretion of the representative director. The common practice of appointing the same person as both representative director and general manager is a mistake.

● Control over the company seal, or “chop.” The person who controls the registered company seal has the power to make binding contracts on behalf of the joint venture company and to deal with the company’s banks and other key service providers. The power over that seal should be carefully guarded. Ceding control over it as a matter of convenience is a mistake. There is a long, documented history of this seemingly minor consideration dooming EJVs.

Steve then notes how the Chinese side to a joint venture will usually refuse to agree to these three measures of control by claiming it is more efficient to have them control day-to-day management of the company. The Chinese side will also often claim that "they cannot bring their political connections, or guanxi, into play unless their own people act as the representative director and general manger." Steve sees these claims as red herrings used to disguise the Chinese company's efforts to gain operational control over the company.

Relinquishing these three control mechanisms to the Chinese company will likely be problematic for the foreign company:

Once these three control mechanisms are entirely under the control of the partner, foreign investors will quickly discover that they have relinquished all power. When this happens, the investor should face the reality of the situation, and either reduce the investment to a minority share or abandon it altogether. Once power over operations is out of an investor’s hands, it becomes very difficult to run a successful partnership in China.

Steve will be speaking on China Joint Ventures at JP Morgan's upcoming China Conference. This yearly conference, which truly is THE China conference, will take place at the Grand Hyatt in Beijing from April 23 to April 25 and it will, as always, include a huge roster of the leading China experts in various fields. Click here for the draft agenda. Steve is scheduled to speak on Thursday, April 24, from 17:00 to 18:00 in the Grand Ballroom Number 1. The title of his talk is "Pitfalls of Establishing Joint Ventures in China."

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Nobody should dabble in international tax. It is hugely complicated, and should be handled only by attorneys and accountants who specialize in it. Incredibly few do. Gary Tober here in Seattle is one who does and he has a great reputation. All of this is a preface for the fact that a reader just emailed me a copy of an article on the US-China tax treaty and asked me if "this guy Tober knows what he is talking about." I wrote back, saying "yes" and I am now linking over to this article, entitled, "US Taxation of a Foreign Person's US Activities and Income Tax Treaty Between the People's Republic of China and the United States."

Go ahead and read this, but do NOT act without first hunting down and consulting with a legitimate international tax lawyer or international tax accountant familiar with the tax laws of your home country and China and the interaction between those laws.

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Stan Abrams of the always excellent China Hearsay blog just posted on the decision of a Guangzhou court to dramatically reduce a previous verdict of life imprisonment to a five-year jail term for a person convicted of stealing money from a bank by taking advantage of a malfunctioning ATM machine. This "rare change of verdict in such a case was made under pressure of public opinion, which condemned the earlier life-imprisonment sentence as ridiculously too heavy."

China Hearsay cites an Asia Times article which sees the judge's public opinion induced charge of heart as a generally good thing:

This case is of significance. On the positive side, it is evident that in today’s China public opinions, expressed mainly through the Internet and mobile-phone text messages, are playing an increasingly important role in supervision. On the other hand, it questions the independence of China’s judicial system.

Chinese courts are often said to be subject to political interference by the Communist Party and its government. This case seems to suggest that the courts also take public opinion into consideration when they make rulings. This may be unthinkable in a place where the judicial system is independent. However, the judicial system with “Chinese characteristics” could hardly be said to be independent, so it may not be such a bad a thing if the public becomes a check on political influence.

China Hearsay disagrees:

Uh, isn’t this like the last thing we want to be encouraging? The judiciary in China has come a very long way over the past few years. Whether public opinion operates as a check against certain kinds of government interference or not, this pretty much sends the wrong message to judges, doesn’t it?

I don’t know about you, but I would not want my fate to be decided by a judge who was checking out which way the wind of public opinion was blowing. And if you tell me that this a good way for the public to get their concerns acknowledged, I would tell you not to bring politics into the courtroom - there’s enough of that already.

This very much reminds me of "jury nullification" here in the United States, which Wikipedia describes as follows:

Jury nullification refers to a rendering of a verdict by a trial jury, disagreeing with the instructions by the judge concerning what the law is, or whether such law is applicable to the case, taking into account all of the evidence presented. Although a jury's refusal relates only to the particular case before it, if a pattern of such verdicts develops, it can have the practical effect of disabling the enforcement of that position on what the law is or how it should be applied. Juries are reluctant to render a verdict contrary to law, but a conflict may emerge between what judges and the public from whom juries are drawn hold the law to be, or the legitimacy of a law itself. A succession of such verdicts may signal an unwillingness by the public to accept the law given them and may render it a "dead-letter" or bring about its repeal. The jury system was established because it was felt that a panel of citizens, drawn at random from the community, and serving for too short a time to be corrupted, would be more likely to render a just verdict, through judging both the accused and the law, than officials who may be unduly influenced to follow merely the established law. Jury nullification is a reminder that the right to trial by one's peers affords the public an opportunity to take a dissenting view about the justness of a statute or official practices.

And, as Wikipedia notes, this sort of thing can be both good and bad:

Notwithstanding perceived righteous applications of jury nullification, it bears noting that this verdict anomaly can also occur simply as a device to absolve a defendant of culpability. Sympathy, bias or prejudice can influence some jurors to wholly disregard evidence and instruction in favor of a sort of "jury forgiveness."

Historical examples include American revolutionaries who refused to convict under English law, juries who refuse to convict due to perceived injustice of a law in general, the perceived injustice of the way the law is applied in particular cases, and cases where the juries have refused to convict due to their own prejudices such as the race of one of the parties in the case.

Given China's judicial system, I think the same is true with respect to popular opinion swaying judges there. Though as American lawyers we should be appalled by a local judge being swayed by popular opinion (has a university sports team ever not gotten a preliminary injunction from a local court against the NCAA?), I actually think such swaying may have a place in China, at least for now. China Hearsay entitled its post, "In Praise of Independent Judges," but until such time as China's judges are truly independent of the government, I actually like the idea of the people having limited influence.

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SFO Airport
Tomokazu Sushi Restaurant
7:52 pm PST
Dinner Before My Next Flight

Just came across this podcast interview with CLB's own Steve Dickinson on the always superlative Danwei blog. The post is entitled, "China Businesscast: China's new labor law, everybody gets tenure" and it provides the following executive summary (which is good because my next plane takes off in twenty minutes and I have no time to listen:

The [new China labor] law was a government response to increasing public concern that employers were mistreating employees, especially in failing to pay proper wages. The Shanxi slavery scandal was a example of the sorry state of employee rights in China that brought the issue to the forefront of the public's mind.

The law has several components, but the main effects are the requirement that employees have formal term contracts, and that employees can only be terminated with cause. This is the polar opposite of termination at will in the United States.

After two term contracts, the employee must be given an open-ended contract. Combined with termination only with cause, it is comparable to the tenure system in American universities. Critics are calling it a return to the iron rice bowl, when companies were responsible for employees their whole lives.

There has been a tremendous amount of publicity about the law, resulting in widespread general awareness, though the public's understanding is not always accurate. The media coverage seems to be driven by the inherent attractiveness of a story that affects everyone, rather than a government propaganda initiative.

Companies need to beware, as ambitious [Chinese plaintiff] lawyers are actively looking to make money and a career testing the new law.

I am sure it is good stuff.

For more on the new law, check out "China's New Labor Law -- It's A Huge Deal. Huge I Tell You."

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Xinhua just reports that, in an effort to prevent sexually transmitted diseases, Beijing's municipal government is making condoms "more accessible in its hotels, nightclubs and construction sites[???]:"

Guesthouses, hotels and scenic resorts are all required to put condoms in toilets, and night clubs, bathing centers and major construction sites should have condom-selling vendors installed.

The city is also organizing trainings for hotel managers on the promotion of condom use.

The city is also showing significant foresight by making it known that "condoms shall not be used as evidence of prostitution and whoring." Beijing appears serious about seeking to reduce sexual transmitted disease.

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A loyal reader just sent me an email asking me what I think of a China Daily article, entitled, "Courts see surge of foreign-related IPR cases." I think the article is a good reflection of what is really going on in the world of China IP.

The article has the usual Chinese government induced fluff on how China is doing this or that to protect intellectual property, but it also includes some very telling numbers:

China has seen a surge in foreign-related intellectual property rights (IPR) court cases since joining the World Trade Organization (WTO) in 2001.

Domestic courts nationwide tried and concluded 668 such cases in first instance last year, compared with only 43 in 2001, said officials attending a national court conference in Jinan, capital of Shandong Province, on Wednesday.

The following nearly immutable rules apply to international business and litigation:

1. Businesses almost always spend money based on a legitimate belief it will give them a return on their investment. Therefore, if foreign businesses are spending money registering their intellectual property in China, they are doing so because they deem it to be good business and it almost certainly is.

2. Litigation is expensive.

3. In light of numbers 1 and 2 above, businesses do not pursue litigation unless they have reason to believe doing so will give them a good return on their investment or in some other way benefit their business.

Bottom Line: Foreign companies are realizing it makes sense to register their intellectual property (China trademarks, copyrights and patents) in China because there is legal recourse against those who infringe upon their IP rights.

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The Off The Record Blog (a really good blog, BTW) just did a short, sweet, blunt post on the law in China that is only half right. The post is entitled, the "The Law is an ass and there you have it." It consists of the following quote from "a prominent Chinese lawyer during a private discussion about China’s new Labor Law":

“The problem with Western companies in China is that you think laws are about compliance; Chinese companies realise they are just obstacles to be avoided.”

In fact, that is only half the problem. The problem is that BOTH the Chinese lawyer and the Western companies are acting rationally and correctly. The Western company has to comply because it will be an easy target if it does not. The Chinese company, on the other hand, can game the system and probably do just fine.

There is also a flip side to this. I had lunch earlier this week with co-blogger Steve Dickinson and Ben Dietz, who just this week joined my firm and who handles US side legal work for Chinese companies. We discussed how difficult it is representing Chinese clients in the United States because they tend to spend so much time and effort seeking to avoid clear laws even when following the laws would be relatively painless and far less risky.

Looking on the bright side (at least for us lawyers), China is very slowly becoming more legalistic and I see the new labor law as a prime sign of that. That law probably comes closer than any other law in China in terms of having an equal impact on foreign and Chinese companies because much of its enforcement will come from disgruntled employees and ex-employees, as opposed to from the government.

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China Vortex did an interesting post on how foreign companies do and should react to Chinese laws. The post is entitled, "Working the Gray Areas in China," and it starts out quoting "Chinese entrepreneurs" saying that if they were to wait until the Chinese government said they could do something, they would never be able to make money. It goes on to say that Americans and Europeans in China "go out of their way to make sure that every 'i' is dotted and every 't' is crossed in all their legal arrangements with the Chinese government. Each executive is effectively protecting himself from litigation and any bad news from the Chinese government."

The gray in the title should apply to both the gaps in the law and to what happens to one's hair when operating outside the black and white lines.

Yes and no. Yes for publicly traded companies, at least in my experience. They generally cannot afford to have a problem in China that stems from their having acted illegally. We have a publicly traded company that has been waiting two years for a Chinese law to change, while in the meantime, it just waits, with a representative office that, near as I can tell, does absolutely nothing. This company can afford to wait but it cannot afford to fail.

On the other hand though, we have a number of clients who are quite willing to move in advance of Chinese laws, even though, in our job as attorneys, we have told them quite explicitly and (always) in writing that what they are doing either does not comply with Chinese laws or very well may be out of compliance. These companies tell us, again quite explicitly, that they fully understand, but they cannot afford to wait. Some of them have even made assessments detailing how long they have to operate without getting shut down to make it worth their while.

Just as Paul points out, we see much of this in fast moving industries:

In China, there are many areas which are not strictly illegal, but they’re not legal either. Most of the time, these involve fields which are too new for the government to regulate. Any government is a slow-moving giant; they are not renowned for their quickness and being smart. In this business ecosystem, the advantage lies with the fast-moving entrepreneur who can identify a need and move in quickly.

China Vortex analogizes these illegal companies to the creative and imagnaitive child who sometimes stays out late:

It’s a little like being a parent; who do you love more, the loyal son who does everything you say but is not creative and imaginative, or the smart son who sometimes frustrates you by coming home late, but is brimming with all kinds of insights and creative ideas and dates all the smart beautiful girls?

He then says that the Chinese government likes "the smart and sometimes naughty son" until "he gets too smart for his own good, in which case they smack him down." My view (based on what has happened with our own clients and with my youngest daughter) is that it is not so much a case of like or dislike, but once caught, the smack-down MUST and does occur. We are working with one client now who was literally told to leave town, but he is reluctant to do so because the profits just keep on coming.

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The Absurdity Allegory and China (AAC) blog makes an excellent legal point in its recent post, "Breaking Eggs in the Bird's Nest." The post is on a March 21, 2008 State Department fact sheet concerning the 2008 Olympics. This fact sheet has received its fair share of coverage from the blogosphere for warning visitors to beware of crime in China and telling them not to expect privacy from the Chinese government (here, here, here, here, here, here, and here). All well and good.

But AAC spotted something crucial in that directive that everybody else seems to have missed or glossed over. AAC notes how "there is a much shorter passage, a single sentence, that many who are planning the trip need to pay particular attention to." That is that if you end up in a Chinese jail, the US government cannot help you get out:

The Department of State or the U.S. Embassy and Consulates General cannot have an American released from prison.

AAC has this to say about this warning:

Is that clear? Can it be any clearer? What this says is that there are no get-out-jail-cards in this game; there’s no stopping at Go to give Dad a call; no one’s going to make your bail before the sun goes down. That’s a fact. And another fact is that if you end up being hauled off to jail, there’s a very good chance that it will permanently alter your perceptions of basic human nature, and it won’t be for the better.

All you folks who have visions of “making a statement” – from unfurling politically sensitive banners to setting yourself on fire atop the Water Cube – think again. This is not Kansas, and, truth be told, it never will be. In fact, it has never had any desire to go that way at all, since not only do the Chinese disagree with Kansans’ views on intelligent design, they also think that all US police forces in Kansas and elsewhere are wimps when it comes to dealing with youth who want to shake things up. They have a history of dealing harshly with that sort of thing here, and if you are unfamiliar with those events, bone up before getting on the plane with your high-minded ideals. They may not beat you to a pulp in front of the camera, but they’ll have you shitting your skivs when the door closes and the world’s on the far other side. And that will only be the beginning. This is something that everyone with an axe to grind and enough money to come to Beijing during an Olympic year needs to know. The State Department has warned you that they cannot get you out of jail. They’re not lying. No matter what you think of George Bush, Dick Cheney or Condoleezza Rice, you must understand that the State Department is not crying “Wolf!” This is China coming-out, and if you want to wreck it for them, then they’re going to make you pay. And the price may be a lot dearer than you can even imagine.

Though I am sure most experienced travelers understand that US (or German or French or whatever) law typically ends at the border when it comes to criminal violations, you would be surprised at how many travelers either do not know this or think that their embassy or consulate will be there to bail them out no matter what. Now before you laugh, please realize many US companies believe their US trademark or patent registrations extend to China, so it is certainly not that large a legal leap for people to believe US criminal law extends to them wherever they may go.

My firm has assisted on a number of criminal cases inside China for American (and European) defendants and, nearly without exception, we are told (usually by both the defendant and his family) that the US Embassy is not doing enough to get the defendant freed from the Chinese jail. When we explain that the US government will not usually employ its political capital on this or that drug or fraud case, our clients seem downright surprised.

So to add to what AAC has already said, let me make it perfectly clear. If you get arrested in China, the role of the US government (be it the consulate the embassy, or whatever), will almost certainly be limited to helping you find a lawyer, helping you contact your family for assistance, and maybe helping you with the logistics of having your family or friends get food or magazines into you at the jail.

I am NOT expressing an opinion as to how anyone should act during the Olympics, but it certainly does not hurt to know the potential repercussions.

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"Let's kill all the lawyers." William Shakespeare.

Okay, so we lawyers are not the most loved people in the world, though US surveys consistently show that though the overwhelming majority of people dislike lawyers, they overwhelmingly like their own lawyers. Surveys also show everyone likes me.

I do not know how whether Chinese companies dislike lawyers, but my firm's own experience tells me they are generally unwilling to pay US legal fees. And since right now US legal rates (at least those at my firm) are laughably low as compared to European and Japanese and Korean legal rates (in large part because the US dollar is so weak right now), I think it fair for me to generalize in saying that Chinese companies do not value lawyers very much at all.

Paul Denlinger has a great post on why this might be so. The post is entitled, "Why Many Chinese Entrepreneurs Don't Like Lawyers," and I find his analysis sound. The post begins with Paul noting that "Chinese entrepreneurs don’t like to work not just with American lawyers, but lawyers of any nationality" and with positing this question:

So why is it that Chinese entrepreneurs don’t like to use lawyers and legal services, even when using them the right way, and intelligently, will help them to greatly expand their businesses?

Paul's answer lies in the differing legal structures of China and the United States.

Paul very accurately describes the face of China law for Chinese companies:

For many Chinese, “the law” is whatever the Chinese government says it is. Just because some new kind of business is done in China, does not mean it is legal, it is just tolerated. It usually means that it is so new to the slow-moving bureaucracy that it hasn’t figured out whether it should be legal or illegal, so it’s “tolerated”.

Your business may be tolerated, then the government says it is “illegal”, or it may be tolerated, then the government says it is “legal”. Then it might switch from “legal” to “illegal” and told to shutdown almost overnight. This happens, and continues to happen all the time. This is part of the price of doing business in China.

Here’s another example.

The Chinese government says that new businesses in China have to list their “business categories” and the business they are in. Think about it; does this make sense? From a business point of view, it makes little if any sense. Let’s say a consulting business needs to do a marketing survey. They may run afoul of the law because this is not allowed; they registered as a consulting business but need to do a marketing survey for a client who wants to enter the Chinese market. So while it makes perfect business sense to do this, the bureaucrats and regulators prevent it from doing so, because from their POV (the government regulators), categorizing businesses makes more sense.

Among Chinese business people, there is a large degree of frustration at these sudden changes which come out in the morning, and may change before the sun goes down. For Chinese entrepreneurs, this is the face of the law.

So, in order to succeed, they spend a huge amount of their time avoiding the regulators and getting warned, or even shut down. If the regulation comes from Beijing and they are in Hangzhou, they will go talk with Hangzhou city government officials to avoid getting crushed because local Chinese officials have the power to “interpret” the law. Sometimes this means ignoring what Beijing says, without openly confronting Beijing.

For Chinese entrepreneurs then, the law is random and to be avoided. Then when these Chinese entrepreneurs go overseas, their views and actions do not change. They fail to realize that the law can actually help them and so they see no point in using lawyers unless and until they are in big trouble.

Believe me, I have seen this. Many times, Chinese clients have come to us in the US and for a very small fee, we could save them considerable risk, hassle and/or penalties, but they will not pay it. They view US law as something to be ignored or avoided. The idea of confronting it and dealing with it as a means of laying a strong foundation for the future seems almost alien to them. Lawyers are to be used when you are in big trouble, but not before.

Paul also attributes Chinese aversion to lawyers to their aversion to a cost structure different from what they are accustomed to in China:

Moreover, they know that the advantage of Chinese businesses lie in their cost structure, and fear losing it if they go overseas. This means that they act very cheap when they go overseas, and acquire reputations for being cheap and micro-managing their foreign employees, trying to extract every little bit of time and value out of them.

In the long-term, this hurts the reputation of Chinese companies as a whole.

In fact, company cost structures evolve and adapt to the market and society they are a part of. No country can have the same cost structure as China, just as no country can have the same values as America does.

Again, Paul is dead on. I have tried getting past this cost hurdle with Chinese companies by telling them about US companies with more than a thousand (1000+) lawyers in their in house legal departments alone (Citicorp and General Electric) and of how my firm has clients who expect to spend around 2% of their gross revenues in legal fees each year. The Chinese companies tend to remain resolute.

But things do change and they will change. Our best corporate clients are those who have been through US litigation and once Chinese companies start getting sued in the United States they will come to realize the importance of preventative lawyering. I have seen this with our Russian clients and I expect it will eventually happen with Chinese companies as well.

They will probably still hate us, but at least they will pay us.

UPDATE: China Hearsay does some "naval gazing" on this issue, here.

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