China Law Blog

A China Daily article, entitled Foreign luxury retail brands fail quality control test: study, (h/t Quality Inspection Blog) nicely highlights what Westerners far too often fail to realize about China: it has laws. More specifically, it has import laws and quality control/consumer protection laws.

Now I know most (all?) of you are murmuring, "of course," but bear with me here. I can cite you example after example where companies and individuals have completely failed to account for this. But first, more on the China Daily article.

The article is on how clothes from well-known luxury goods makers like Hermes, Versace, Dolce & Gabbana, Paul & Shark, Trussardi and Hugo Boss were "proven to be substandard in a routine quality control test." and then ordered "to be withdrawn from sale." These garments "were manufactured in Italy, Morocco, Korea, France, Turkey, Vietnam and India before being imported into China" and "covered a range of attire, from jeans and T-shirts to sweaters, skirts and suits:"

Defects in the manufacturing included poor color fastness, unacceptable amounts of acid and high levels of formaldehyde, which can cause skin rashes, eye irritations, allergies, respiratory problems and even cancer, the report warned.

Another fault uncovered by the test included improper labeling. In response to this claim, Cao Lei, a communication director with Hermes in China, said:"Zhejiang administration took the samples in December 2009 and we were informed of the results in January 2010. It is undeniable that we have made some mistakes in labeling and we have started to correct all of the labels on the mainland, which will be finished by the end of March."

What happened? I do not know what happened here, but I can tell you about other instances of which I am aware and the answer is complete inattention. Here goes:

1. I am going to have to be incredibly vague here, but we had a client, fairly well known company too, that spent millions building a factory in China, only to be told that it could not import an item absolutely critical for manufacturing its final product. It had taken this company a year and lots of money to prove the safety of this item to the United States Environmental Protection agency, but for some reason, it had simply never occurred to the company that China might require the same sort of proof. It went through full on testing of this item in China and eventually it was able to open the factory, nearly a year later.

2. I every so often get calls from doctors, dentists, and architects, with plans to go to China to practice for a while, oftentimes in quasi-retirement. I ask them whether they are licensed in China and there is always a long pause. They then say that it never even occurred to them that they might need a license to practice their craft in China and they then ask me what it takes to secure one. I then say that I am not even certain a license is required, but I just assume that it is and that I do not know what it takes, but would be happy to research it for them. Since none of these people ever hired my firm for this research, I still do not know if a license is required, but I still assume that it is.

3. Many years ago, I was involved in a dispute involving millions of dollars in bad fish product. And when I say millions of dollars, I mean millions of dollars for the bad product itself, which had value as pet food. The product was eventually shipped to China where it was rejected. I later asked the party that had shipped the product to China why it had shipped it there as human food, rather than as pet food and the response was that they did not know China conducted food inspections.

4. Company shipped product (and again I have to be vague here) to China where it was rejected as not being "strong enough" (and I am being vague here too). The company had shipped its product to about ten countries in the past and maybe two of them had strength requirements similar to China's. Company just assumed China's strength requirements would not be on the "high end" and so had never even bothered to check. Company assumed wrong and product was rejected.

Bottom Line: China has import laws, quality standards, and licensing requirements and you should know what those are before you ship or manufacturer your goods or go there as a service provider.

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With President Obama talking about doubling U.S. exports and with China's economy booming, it seems appropriate to talk about what should go into a sales contract with China, when you, the foreign company, are the one doing the sale.

The big thing -- almost, but not quite the only thing -- in such a transaction is the payment terms. In turn, the payment terms greatly influences the complexity and the terms of the contract. The old saying that "possession is nine tenths of the law," is actually great advice when it comes to international sales contracts. If you are selling product to China and you get paid in full in advance, you are at least 90% of the way towards full protection.

Unfortunately, it is the rare sale into China that involves full payment up front. So if you cannot get full payment upfront, you should consider, at minimum, getting a sufficient upfront payment to cover your costs, thereby ensuring that even if you receive nothing more, you will have covered your costs.

If you are not going to get full payment upfront, then you need to figure out what you can do to maximize your chances of getting the rest of your payments. There are many things you can do to improve your chances, including the following, many of which can and should be combined:

1. Conduct due diligence on your Chinese buyer. There are services that can do this at relatively low cost (typically USD $500 to $1500, depending on the depth of research performed).

2. Hold back title. Write your contract so that title to your widgets does not pass to your Chinese buyer unless and until you receive full payment.

3. Choose your venue for contract disputes wisely.

4. Secure payment by using a Letter of Credit. The International Business Law Advisor did a post, entitled, "How to Secure Payment from Your Overseas Customers with Letters of Credit" nicely explaining how these work:

There are four participants in a letter of credit transaction — two businesspeople and two banks:

The buyer. That’s your customer.

The opening bank. This bank normally issues the letter of credit, so it is sometimes referred to as the “issuing bank.” They assume responsibility for the payment on behalf of the buyer.

The paying bank. This is the bank under which the drafts or bills of exchange are drawn under the credit. A paying bank in an L/C transaction might also act as the negotiating bank, advising bank or confirming bank, depending upon what responsibilities it accepts.

The seller. That’s you.

To summarize the process: Once you and your customer agree on payment by letter of credit, it is the customer’s responsibility to take your proforma (an invoice that reflects all estimated costs involved to move product door to door) to her bank and open the L/C (letter of credit) in your favor. Once the opening bank has all the appropriate information from the customer, it advises you, the seller, that the L/C has been opened. Oftentimes this will be done by cable or e-mail to the paying bank. Your bank then forwards that information to you. The letter of credit is final and subject to correction only for errors in transmission.

The post correctly notes how "accuracy in all details of your letter of credit is critical." The problem with letters of credit is that, contrary to what some believe, they do not guarantee you will be paid, even if you fully comply. My firm handle a case involving a fake letter of credit and another case involving a dishonest bank that failed to honor its letter of credit without any basis for doing so, beyond its own desire to stay in good stead with its client.

What do you do to make sure you will get paid?

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Spoke with a China lawyer friend of mine today who told me his firm had not "done" a single China Rep Office for the last six months. Every time someone had contacted them with plans for a China Rep Office, it ended up as a WFOE. I told him the same thing had been happening at my firm as well and that the only time I could remember not trying to talk a client out of forming a Rep Office was for a company that would have one foreigner in China doing nothing but shilling for an offshore service whose cachet was based in large measure on the fact that it is foreign. In other words, a class Rep Office situation but with the additional twist of the company wanted to trade off and even enhance its foreignness.

China is killing Rep Offices and the reason it is doing so is to increase its tax collections. In the past, Rep Offices virtually always provided substantial tax savings. In the past, forming a Rep Office was nearly always faster, cheaper and easier than forming a WFOE. Now, it is usually a push and because WFOEs are so much more flexible in terms of what they can do in China, it has truly become the rare instance where a Rep Office makes sense. Rep Offices, unlike WFOEs, are not allowed to engage in profit making activities. Chinese law limits them to performing "liaison" activities.They cannot sign contracts or bill customers. They cannot supply parts and after-sales services for a fee. They simply cannot earn any money in China or take any payments from a Chinese person or business for any reason.

In the last year or so, China has increased the tax rate on Rep Offices, greatly stepped up its enforcement of Rep Offices in terms of making sure they are not engaging in anything more than "liaison" activities, and instituted various other provisions to make them less favorable/more expensive. Just by way of example, Rep Offices have always been required to "hire" their employees through an outside third party agency such as FESCO, but what makes that so onerous now is that all of these agencies (at least as far as we know) require a minimum two year employment contract.

And now there's more. The Seyfarth law firm's visa group just came out with an article, entitled, "China Changes Rules Governing Representative Offices," talking about some more rules for Rep Offices:

China’s State Administration for Industry and Commerce (SAIC) recently instituted new regulations for representative offices of foreign companies (ROs) in Shanghai , limiting head count as well as the validity period of the RO’s registration. ROs are now only able to sponsor a maximum of four foreign representatives. In addition, the registration certificates for ROs must be renewed annually. Though these restrictions are only being implemented in Shanghai currently, they will be implemented throughout China in 2010. These new restrictions do not apply to representative offices of foreign law firms.

The article goes on to note that these new regulations mean that work permits will be for one year not three as was formerly the case for Rep Office employees and is typically the case for WFOE employees. The article concludes by noting that the SAIC will perform on-site inspections within three months of the issuance of their registration certificates and Rep Offices that have performed any illegal activities could face fines and a delay in their renewals.

China does not like Rep Offices and the situations in which they still make sense are becoming even rarer.

For more on Representative Offices in China, check out the following:

-- How to Form a Representative Office in China

-- Representative Offices In China. Things Just Got More Difficult/Expensive...

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Sometimes the strangest things get me to thinking. Today it was an article, entitled, "Court of Appeal rules on without-prejudice communication," by London lawyer, Andrew McGregor. An incredibly rough summary of the article is that British courts will exclude settlement negotiations as evidence.

Bear with me here, as there will be a China angle here soon.

As an American lawyer, my first thought was, "of course." Of course because US Courts have long had such a rule. But does China have such a rule? I do not know, but I doubt it. The point here though is not whether China has such a rule or not, but how easy it can be to engage in settlement negotiations on a Chinese case without giving any thought as to whether your communications might one day show up as evidence in court. US lawyers do not even give this a second thought, and that is really the problem. It is difficult to take what has become instinct and re-examine it each time you are dealing with a new country.

Back when I was just starting out as a lawyer focusing on emerging markets, I wrote an article setting forth what I saw as the "Four Principles of Emerging Market Success, which included the following:

PRINCIPLE TWO: Keep an Open Mind. Assume Nothing.

Doing business in an emerging market means taking nothing for granted. I have a mantra for my own legal work in these countries that translates well to the business world: "Assume nothing, but assume that you are assuming things without even realizing you are doing so."

Things will be different. Very different. Things you take for granted in your home country might not exist in the emerging market country. Things you take for granted in your home country might be the exact opposite in the emerging market country. Things you think will be totally different in the emerging market country may be exactly the same. Things you thought you knew about emerging market countries based on what you know from another emerging market country may be completely different in a neighboring country, or even in another region within the same country. The principle, one more time: Keep an open mind, and assume nothing.

My firm and I are involved right now in a very high profile case in an Asian country other than China (and on which I hope to be able to write more later, but which is too sensitive right now) that is forcing us to confront anew certain legal doctrines we usually just take for granted, such as the following:

1. Right to counsel of your own choosing.
2. Right to due process.
3. Admissibility of hearsay evidence.
4. Conflicts and waivers of conflicts.

These are the sort of things that go to the heart of lawyering and yet seldom arise in the typical international business transaction. We are finding ourselves wanting answers to these sorts of very basic issues as those answers may influence our overall strategies.

I actually enjoy being tossed out of my comfort zone from time to time and I would guess most of our readers do as well. I say this because Westerners interested in China almost have to be the sort of people who revel in the new and different. Right?

Stories welcome.....

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David Dayton over at Silk Road International has just written a great post on China lawyering, without even knowing it or trying to do so. His post is entitled, "Reasons why a factory doesn’t want you to come see things," and the main point is the conclusion: if a Chinese factory does not want you visiting, it has to mean something bad is afoot.

Dayton sets out the excuses he hears as to why it is not the time for him to come to the factory and then he lists the following as the only possible real reasons:

Regardless of the words used, my experience tells me that there are really only a few reasons that you can’t go into a factory to see your product for a scheduled QC visit (or any other reason):

1. They are not as far along as they should be.

2. They are not actually making the product.

3. They don’t want you to see how some part of the process is done.

4. They don’t want you to reject product or change processes.

5. They are busy and have scheduled legitimate appointments with others on your requested day.

6. They are closed (no power?), have repairs/inspections/other issues that would not allow you to come see product on your requested day.

Dayton then talks about how since you are the one buying the product, you should be able to come visit and if the reason is numbers 5 or 6 above, then you should be able to come out soon in any event. But since this is really a post on handling legal issues in China you will need to read Dayton's post if you want more information on the factory side.

Dayton's post is about the legal side in that we lawyers constantly have to deal with similar excuses, only with far more vituperation (try using that word on your kid sometime when they are really angry at you). With us lawyers it is documents or a demand to see a law. Here are some real world examples:

1. Client of ours is trying to buy a Chinese factory. We are conducting due diligence and determine the first set of books are totally rigged. We demand the real set and are told we already have it. We say "no deal" and then we are given a second, slightly better set, but not the real one. We ask for various documents the factory is absolutely required to provide the government to operate. The factory tells our client that we do not understand China and says there is no such thing as those documents and that nobody actually provides them to the government. We tell our client that we had no issue in getting those exact same documents in our last five such deals and our client (wisely) chooses to walk away from this particular deal.

2. Client of ours is seeking to lease a factory and form a WFOE (Chinese Wholly Foreign Owned Entity). When forming a China WFOE, it is critical that the WFOE-to-be's lease be one that complies fully with various requirements for leases of WFOEs. We tell our client that we need proof that the alleged landlord actually has authority to lease the factory and we set out the various documents that would prove that authority. The "landlord" tells our client that it has approval from the mayor to lease the factory (it did) and that we American lawyers do not understand China (we were working with one of our favorite Chinese law firms on this deal) and that if we persisted in requiring these documents, the deal would be off. Our client said it would have to abide by our advice and the Chinese "landlord" then produced documents which showed that the property was actually part of a collective and could not be leased out to a foreign entity. So again no deal.

3. Client of ours was looking to do a joint venture with a Chinese entity. Our impression was that the Chinese entity was not really interested in our client for the long term, but only to strip it of its valuable intellectual property. The deal the Chinese entity was proposing seemed almost too good to be true in that our client needed only to contribute its IP to the venture. We told our client that such a contribution would not be sufficient to make the joint venture legitimate (there has to be a monetary contribution) and we counseled against going forward. The Chinese company (you know the drill by now) told our client we knew nothing about China and its laws (and again, we were working with a top-flight Chinese law firm) and that the Mayor was behind all this (and again he was). We asked the Chinese company to come up with some law that would justify such a deal and they came back to us with a bizarre and incredibly tortured interpretation of the statutes which forbid this. Our client (wisely) walked.

Now I am not saying that the Chinese company that says you cannot see their factory or documents that day always is out to put one over on you, but I am saying that most of the time if you have a valid basis for wanting to see the factory or the documents, there is a lot to be gained and learned by sticking by your guns.

UPDATE: Just learned of this very thoughtful post, entitled, "You Don't Understand China," over at the very new blog Red, White and Blue in China. According to the post, "there are several reasons why a foreigner might be told “you don’t understand China,” in my experience sometimes what the speaker really means is:"

• “In fact, you really don’t know that much about China.” • “I can’t be bothered to come up with a coherent argument or explanation, so let’s just attribute this problem to your ignorance.” • “I know more than you, let’s keep it that way.” • “I’ve done something wrong, but it’s ok because I going to try to cover up my actions with my country’s culture, inadequate legal system or pervasive corruption.” • “This is China, I’m Chinese, let’s just do what I want to do.”

The post goes on to talk about how "you don't understand China" gets said a lot in China and how it is "too often used as a crutch to dismiss valid concerns by outsiders." I like how it then says that "[w]hen you do business here, if you let anyone say this to you and get away with it, you probably deserve to lose your shirt." The post also provides an excellent retort: “explain it to me:”

If after saying this you are told ‘no’ or confronted with a multi-layered attempt at obfuscation, then you know what you are dealing with. That person has no interest in helping you, which also probably means you don’t share a common objective. You will need to deal with that misalignment as best you can. If it’s important enough to you, it’s time to invest in finding someone who can answer your questions. This is where the high-priced consultants, or maybe different business partners, come in.

On the other hand, if your genuine interest in hearing an explanation about what you supposedly don’t understand is met by a real attempt to enlighten you, then you have found someone who cares enough about their relationship with you to foster it with knowledge. Dear readers, such colleagues, business partners and friends are worth their weight in gold. Find them and reward them.

Excellent advice.

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Geraldine Johns-Putra over at the View to China blog (just added it to our blogroll) just did a post I really love, called, "Ten things about doing deals in China that are different from the West – Part 1." I love it both because it is helpful and because it does a great job of expressing some of the peculiarities of deals in China.

1. The Sino-foreign joint venture. Ms. Johns-Putra's take on these is that negotiating these often becomes "more adversarial than it should because it feels like two parties are trying to carve out their individual niches and protect their own turfs. It can be easy to forget that the point of the exercise is to provide the basis for the ongoing management and governance (and success) of the jointly-held company."

I completely agree that negotiating joint ventures often becomes adversarial, but I also think that is often necessary and in some ways can actually be a good thing. Better to know before going into a joint venture that it is not going to work than to learn about it only later. For more on the difficulty of doing joint ventures in China, check out the following:

-- China Joint Ventures Again. This Time We Blame The Victims.
-- Love The One You're With. When China Joint Ventures Make Sense.
-- China's Joint Venture Jeopardy

2. Rigid capital and profit distribution structures. Ms. Johns-Putra has this to say about the rigidity of joint ventures:

Along the way, a foreigner discovers that certain issues are pretty rigid in China, especially when it comes to the Sino-foreign joint venture model. One of them is the capital structure and how much one can derive from the investment relative to one’s investment. Indeed, one obstacle that private equity firms found investing in China is that the Sino-foreign Equity Joint Venture structure requires that profits be distributed in accordance with the proportion of equity holdings. If you own 50% of the company, you get 50% of the profits.

She's right and what she says here applies to much of Chinese law, in that it is much more formalistic and rigid as compared to the West.

3. Reciprocity in negotiations. Ms. Johns-Putra does a great job explaining this one, which really does require a full explanation:

I confess I used to find this one amusing. I think it is less and less an issue, as Chinese counter-parties become more sophisticated and are less demanding of complete reciprocity in a contract. Some years ago, however, it was not unusual that a Chinese counter-party, when asked to provide a certain undertaking, would insist on a reciprocal undertaking by the foreign investor to ensure “fairness”. At times, the request didn’t make sense, e.g. when the foreign investor requested that the Chinese enterprise provide warranties regarding its assets because it was buying them from the Chinese. Why should the buyer then provide a warranty on its assets?? Often, however, reciprocal undertakings are easy to give away, since they have no real meaning anyway. (And from a philosophical viewpoint, in a negotiation, should you really be asking for something you would not give anyway?)

I too have had to deal with this issue in drafting contacts with Chinese companies, only I never found it amusing. I am a perfectionist and I have always believed contracts should not contain any meaningless provisions. My fear is that what should be seen as a meaningless provision will not be so viewed by a judge or arbitrator who will (rightfully) believe that it could not have been put in the contract for no reason, and then will seek to interpret it to have meaning. And that meaning may not be the meaning I want. This is still a problem and the reason is because so often Chinese companies skimp on their lawyers and demanding whatever the other side gets (no matter whether it makes sense or not) is a classic sign of a bad lawyer.

4. Demands based on fear of the other. Again, I will quote Ms. Johns-Putra directIy:

I put into this category demands about governing law and the dispute resolution forum. Many foreign clients I have known had a fear of submitting to Chinese law and agreeing to dispute resolution in China. Many Chinese parties seemed to feel exactly the same way about foreign laws and foreign arbitration and courts. There is more to this than I can go into here, but essentially agreeing to arbitration or even the jurisdiction of a court in China is not such a bad idea, since (i) arbitration at the China-based China International Economic Trade and Arbitration Commission (CIETAC) is easier to enforce than a foreign arbitration award which can be simply ineffectual in China (just ask Danone) and (ii) foreign court judgments mean nothing if the Chinese party does not have assets in that jurisdiction. Governing language clauses also fall into this category. If a foreign investor is willing to submit to the jurisdiction of a Chinese court, then it follows that the Chinese language version should govern, since the court will not read anything else. For many years, I used to automatically provide for both English and Chinese language versions to prevail, but I am no longer convinced this is workable. You can find much more on this issue over at the China Law Blog, and I am indebted to them for making such good sense about these issues so many times that it convinced me they were right.

I agree with all of the above.

What I am always saying regarding the official language of a contract is that it is always better to agree on one language than two languages just greatly increases the chances for misunderstandings and attorneys' fees should a dispute arise. For more on why one language is so much better than two, check out "China OEM Agreements. Why Ours Are In Chinese. Flat Out."

5. Agreeing to agree. Again, I have to just quote Ms. Johns-Putra directly, British spellings and all:

Another personal favourite of mine, like the reciprocity requirement, chiefly because this had some lessons for me. Many China-related contracts I’ve drafted contain a clause that there are outstanding issues that the parties haven’t yet entirely resolved and would agree on in time. Often, the clause — or at least the principle — is handy when there is just some little detail the parties can’t quite agree on but feel like they’ve had enough and need to move on and sign the thing. In the English system of law, clauses that don’t pin down an obligation on a party are called “agreements to agree," and they are generally seen as worthless. Yet, I have drafted many contracts with “agreeing to agree” clauses like that, that never needed to be readdressed. The main thing is the deal got done and everyone moved on. Plus, I’ve drafted “amendment agreements” so many times, that I know that even if parties have agreed on something, they can change their minds or need to clarify things after the fact. It is just human nature. So maybe the Chinese are onto something when they recognise it upfront and don’t try and dot every “i” and cross every “t”.

This was actually my favorite of the list because it was one that initially drove me crazy, but with which I have learned to deal and even sometimes appreciate. It is so non-Western and Western lawyers tend to really hate it because it is so counter to our training. It actually comes up all the time. Here are a few somewhat composite examples:

1. Large, well funded Chinese company needs US technology to improve its quality and increase its sales. It contacts our client wanting to do a joint venture. Our client, quite wisely I think, wants to go into China more slowly so instead agrees to license out a few of its products to the Chinese company. The licensing is a way for our client to make good money in the short term, while at the same time, it serves as a great mechanism to determine whether this Chinese company is one with whom it wants to and should be getting closer. We draft the licensing agreement and the Chinese adds a number of provisions talking about how if the two companies do well with their licensing agreement, they will form a joint venture along such and such terms.

My sophisticated client and its in-house lawyer are completely non-plussed by this language. The in-house lawyer wants it removed completely, rightly fearing that whatever language is in there is an open invitation for a law suit if a joint venture never happens. The client itself, however, rightly feels that simply stripping it out will be deemed an insult to the Chinese company and go contradict much of what they had been discussing and one of the purposes for the joint venture.

I agree with the in-house counsel that such provisions are dangerous and I talk about how if we are going to sign off on the language the Chinese company has put forth, we really ought to draft up and negotiate an entire "tentative" joint venture agreement. But that makes no sense at all because, as I point out, my firm does not offer a "tentative" discount and so the drafting and negotiating of such a joint venture agreement will cost no less than a "real" joint venture agreement and joint venture agreements are expensive. In fact, in deference to #1 above, joint venture agreements are pretty much the only agreement we seldom do on a flat fee basis and the reason for that is that they are so unpredictable in terms of how much attorney time they will require due to the impossibility of predicting how contentious they will be.

So instead, I propose we replace the two pages of the Chinese company with something along the lines of how both parties hope this agreement will allow them to get to know each other well enough such that they will want to strengthen their relationship with future ventures. We did this, the Chinese company was fine with it, and we achieved Kumbaya

We represented a large US service business that had a very successful multi-year working relationship with a Chinese counterpart. The American company would bring on its Chinese counterpart most of the time when it had China-based work and the Chinese company would do the same when it had US-based work. But one day the Chinese company proclaimed that it wanted to "formalize" its relationship with the American company. I do not think the Chinese company used the word "formalize" but that was certainly the gist of what it was saying it wanted.

Our American client was vehemently opposed to formalizing the relationship. The American company loved its relationship with the Chinese company, but felt that in at least a few areas, it was not the best Chinese company to use. The American company also saw no benefit to changing the relationship because it had been working so incredibly well and seamlessly and it worried that negotiating and putting it all on paper risked doing it harm. As things stood, the US company simply paid the Chinese companies regular rates whenever it brought it on and everyone was happy with the financial aspects of that relationship. Lastly, the American company was concerned that if it formalized its relationship with the Chinese company, it would look strange if it did not reflect that relationship in some way on its website, and it did not want to do that for fear of offending some of the other Chinese companies with which it also did business.

Yet at the same time, our American client was scared to death that if it said no to "formalizing," it would lead to the end of a great relationship.

At this point, I will admit that in both of the two above examples (and probably in every other one in which I have been involving aspirational language) at least one person has always sought to analogize the situation to dancing at a prom, dating, going steady, or going to bed with someone. I note this but also note that I have refrained from resorting to such language in this post.

So I suggested we seek to figure out what the Chinese company really wanted from this relationship and that my law firm do the talking with them as we could do so in a more neutral less emotional way and we could do so in Chinese. So we talked with the head people at the Chinese company and learned that their goal was more than anything a desire to commemorate/memorialize/recognize their excellent relationship with the US firm --yes, commemorate/memorialize/recognize are the words I am meaning to use here. The Chinese firm wanted to do this for the following reasons:

-- as a way of showing the American company how happy they were with the relationship;
-- so they could brag to their Chinese clients and potential Chinese clients that they had an affiliation with a top American company
-- so that their employees and potential employees would know that they had an affiliation with an American company.

So working with the Chinese company, we were, in very short order, able to draft up a two page document the Chinese company absolutely loved and yet had virtually no legal impact. The document merely started out talking about how great the relationship had been and how both sides wanted it to continue. The document talked about how the parties would continue to try to refer appropriate work to each other and work on matters together, when appropriate. It concluded by talking about how the parties hoped that their relationship would continue to grow and prove financially sound for the two of them. The two companies got together for a great dinner with a lot of toasts and signed the document.

This was at least three years ago and every "aspiration" in this document (note how I did not say contract) has been fulfilled. Such a document would be pretty much unheard of in the West where everyone is super sensitive to legal entanglements and, in a perfect world, I would have counseled my client against signing it as well in that it violates the rule I discussed above about legally meaningless provisions. But in the real world, business exigencies, not ultra paranoid lawyers, do and should drive business and using "aspirational language" can be a great way to solidify relationships in Asia (we have done similar things with companies in Vietnam, Korea, Japan, and Russia -- which is in many ways more "Asian" than "Western" in how it conducts business).

Don't want to sound like too much of a geek, but I can hardly wait for Ms. Putra to come out with part II.

What do you think?

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Now I know that one of the overriding themes of this blog since its inception is that China is stepping up its enforcement of laws against foreigners, but I am getting a strong vibe that things just ratcheted up another notch or two.

Two times in the last few weeks, two clients in two different industries and two different cities, but both of whom we are in the process of registering Wholly Foreign Owned Entities (WFOE) reported how Chinese tax authorities had come by to complain about their not paying their taxes. In both cases, our clients informed the tax authorities that they were just in the process of starting out and explained how they were waiting to hear back on their WFOE applications. In both cases, the tax authorities told them to hurry it up, which is great except the company registration people seem to be taking longer than ever these days.

Never before had a client of ours been approached by the Chinese tax authorities during the pre-WFOE stage. I see this as part of the tax crackdown against foreigners I discussed in the post, "China's Top 5 Business Law Trends For 2010:"

3. China will increase its tax collection efforts. This has been going on at a rapidly accelerating pace over the last six months or so. If your China operations are not making a healthy profit, do not be surprised if the government imputes healthy profits to it. In particular, the government will look very closely at your transfer pricing and in many cases it will not like what it sees.

We also just got two denied China visa calls and we usually only get two or three of these a year. Both came from people insisting they had been getting China visas for years without any problem, and that nothing should have changed for them.

What is going on here? Is this just a payback for America's recent foreign policy? If so, is this being coordinated from Beijing, or is this just some locals expressing their own unhappiness regarding a few F-16s? Were the visa denials just a Shanghai Expo house cleaning? Or is all of this a sign of China's intention to increase the pressure on foreign businesses even further?

What are you seeing/hearing out there?

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A few months ago, I spoke in New Orleans at a Chinese Drywall Conference. I was introduced as the person who would explain whether it would be possible to sue and collect from the Chinese companies involved in providing the drywall that may eventually cost between USD$15 and $25 billion to fix. I began my speech by pretty much saying forgetaboutit.

I then talked about various strategies for seeking to collect from Chinese companies and the defensive strategies Chinese companies employ. One of the things I talked about was how the really smart Chinese company sued in a United States court might stall and then intentionally lose on the merits. Here's how I have seen it work.

US company sues Chinese company in a US court. US company tries to serve the Chinese company but fails to comply with the Hague Convention on Service of Process. The Chinese company can then do one of two things. It can let the improper service "slide," figuring it can always use that to prevent enforcement of the United States judgment at some later date in some other country (or maybe even in the United States) or in China. Or, it can claim to the United States court that service was improper and the case should be thrown out or, at minimum, delayed until proper service is effected.

This is no small decision for a Chinese company defendant and a whole host of variables go into making it, the most important being where it has its assets. But central to its decision is its knowledge that Chinese courts do not enforce United States judgments, no matter how service was effected. So why should the Chinese company even bother disputing service in the the US court when that court's judgment will never be enforced in China anyway? The answer is that though US judgments are not enforced in Chinese courts, they are enforced in the United States and they are generally enforced in a few other countries as well, like Canada, the U.K., and South Korea.

So by fighting the service issue in the US court, the Chinese company can buy considerable time at very little expense. But why should the Chinese company care about buying time? The Chinese company buys time to get its international house "in order" so that when the plaintiff does eventually get the US judgment, the Chinese company has had sufficient time to move its assets and restructure its businesses so that it has nothing left for the US plaintiff to seize, anywhere in the world.

Because service of process in China pursuant to the Hague Convention can take anywhere from three months to a year, forcing a US company to comply with Hague Convention service rules usually gives the Chinese company the time it needs. Then, once proper service has been made, the Chinese company will fight just hard enough on every issue to keep the case going as long as possible at the lowest cost possible. I have seen Chinese companies do this using some of the worst and least expensive lawyers known to man. But since the Chinese company has pretty much conceded defeat and is merely trying to buy the most time at the lowest cost, its choice of a terrible (but really inexpensive) lawyer is oftentimes not illogical. Then when the US company finally gets its judgment, the only way it can collect on it is to pursue the Chinese company's assets in China, all other assets of the Chinese company having been moved out of reach.

But enforcing a US judgment in China and going after a Chinese company's assets there is pretty much impossible because Chinese courts do not enforce US judgments. Repeat: Chinese courts do not enforce US judgments.

So now the American company has a judgment against a Chinese company but no way to enforce it in China. So what can it do? It can try to seize assets of the Chinese company in some other country, but almost certainly the Chinese company has restructured its operations (remember the delaying/stalling part) so that it has no assets outside China to be seized.

What about the American company suing the Chinese company in China? The problem with that is that the Chinese company will claim the American company cannot re-litigate its case in China after having already fully litigated it on the merits in the United States. The legal term for this is res judicata, which is a doctrine prohibiting parties from trying the same case twice.

Losing in the United States court might actually be better for the Chinese company than not litigating in the US. Losing in the United States means the Chinese company has a judgment against it that probably can never be enforced and it also now has a weapon to prevent the US company from suing it again anywhere else.

I fully expected to see stalling by at least some of the Chinese defendants in the Chinese drywall litigation. The Sarasota Herald Tribune recently ran an article, entitled, "Company Out of Drywall Trial," with the following as its lead sentence:

The Chinese company that was to provide the manufacturers' defense in a tainted drywall case shocked participants by dropping out the day before the trial began Friday.

I would actually have been more shocked if this Chinese company had put on a full-fledged defense.

Now for an apology to someone I had never even heard of until I read this Fort Myers News Press article today, entitled, "Drywall liability in courts." A reporter for the Fort Myers News Press contacted me back in October, 2009, after I wrote a post, entitled, "Chinese Drywall Cases Make U.S. Lawyers Angry. I Want My Lex Americana!" In that post, I went after some Chinese drywall plaintiffs' lawyers for having proposed some pretty absurd methods for collecting from Chinese defendants:

The article talks about the 300 drywall lawsuits currently pending in New Orleans Federal Court and asks "who's going to be on the hook for any damages courts might award?" The article then outlines some of the tactics the plaintiffs' lawyers are considering for trying to collect and guess what? None make any sense.

The lawyers are "considering" suing "U.S. investment bankers who financed the Chinese companies, and seizing ships that brought the drywall to the United States." With all due respect, the odds of either of these tactics generating any cash are pretty much zero. First off, it would surprise me if any of the Chinese drywall manufacturers were financed by "US investment bankers." Does anyone disagree with me on this? Second, I also doubt very much that any US court is going to set aside 200 years of US (and a couple more hundred years of British) jurisprudence and find the investors liable. I certainly hope not as I own shares in drug and tobacco companies and by this logic, I could be held liable for injuries caused by those companies.

The arresting ships idea is probably even more ludicrous. What these lawyers are proposing is to do something that has, as far as I know, never been done anywhere in the world or at any time in the long history of shipping, and that is to find the shipper liable for having shipped a perfectly legal product. Not only has this never been done, but if it were done, it would probably destroy the shipping industry as we know it and, at minimum, raise the price of pretty much every single product worldwide. Can you even imagine a system where shipping companies are forced to guarantee the quality of every single item they ship? I can't and if any of my law firm's shipping companies get their vessels arrested over this, you can bet we will be counterclaiming for wrongful arrest.

And it is not just plaintiffs' lawyers who are getting mad. U.S. District Judge Eldon Fallon found one Chinese company, Taishan Gypsum Co., in contempt of court for ignoring the suits. And though I am on record in this post ("China Tooling/China Consulting -- I Told You So") for stressing the importance of abiding by Federal Court orders, I do not for a minute believe the Taishan Gypsum is going to care one whit about what some U.S. judge has to say. If Taishan Gypsum conducts no business in the United States or in any of the very few countries that typically enforce U.S. money judgments (I very much doubt any country enforces U.S. contempt orders) U.S. court orders almost certainly mean little to nothing to it. Most US judgments against Chinese companies have no value beyond the Chinese company owner's belief that it will preclude his/her son or daughter from attending UCLA.

The article then states how US lawyers "said Chinese companies are virtually insulated against liability in U.S. suits because suing them through international court is costly and time-consuming and civil judgments in U.S. courts are not enforced in China." I agree with the part about US court judgments not being enforced in China, but I do not know what they mean by an "international court." International courts are not going to take a drywall case so I am going to assume that Chinese courts was meant here. Again, these lawyers are wrong. Suing in Chinese courts is way cheaper and way faster than suing in US courts. The problem with suing in a Chinese court in a case like this is not the time or the cost, it is the damages. Chinese courts are incredibly stingy (by US standards) with damages for pain and suffering and lost profits. A win in a Chinese court might mean no more than a full refund for the cost of the drywall.

But at least one lawyer believes the future for plaintiffs' lawyers in these drywall cases looks bright because....well....because he really really wants it to:

Herman said plaintiffs' lawyers were up to the challenge. "I think we can bust the dam in this case," he said. "You're talking about billions of dollars" at stake, Herman said. "We're going to find some ways to make them responsive."

I was interviewed yesterday by the Center on the Global Legal Profession and was asked what has surprised me in my practice of international law. Among my answers was how how so many American lawyers still refuse to recognize that foreign country's laws tend to be very different from ours and that U.S. law does not cover the entire world. As much as we U.S. lawyers (myself included) wish it would, it just doesn't and it never will.

The Fort Myers News Press reporter emailed me again this week asking me if she could use what I had told her back in October for an upcoming story:

I interviewed you last October for a story I did on the difficulty of recalling Chinese drywall. I asked you about the federal multidistrict drywall trial in New Orleans and the plaintiffs' lawyers' idea to seize ships that bring drywall into the U.S., if Chinese manufacturers continue to thumb their collective noses at the courts.

Well, in the just concluded first trial in New Orleans, more than one lawyer is again raising that specter.

I didn't use your comments before because of lack of space and also, it deserves to be part of the litigation story. I'm doing a story in the next couple of days on the results of the first "bellweather" trial on the issue and what's next. I want to address the "seizing the ships" issue.

Below are your comments taken in our phone interview in October. May I use some of them in the story? If not, would you allow me to interview you again for fresh quotes on the issue? Please let me know. Thanks very much,
Mary

Mary Wozniak
Senior staff writer
The News-Press
Fort Myers, Fl.
239-339-1020 office

I made a few minor tweaks to what she had down for me and then told her she could go with the following:

OCTOBER INTERVIEW Question was about an attorney on the plaintiff steering committee in multi-district drywall litigation in New Orleans saying that federal court should satisfy judgments against drywall manufacturers by seizing ships with manufacturers' assets.

My quotes from you:
"If he thinks the U.S. Courts are going to be willing to destroy international trade on this issue, I wish him all the luck in the world."

"Think about it. Say you fly up to Seattle and you punch me, should I be able to seize the airplane you flew on?"

"It's absurd. It's lunacy. And some of these shipping companies are huge Some are not Chinese. Some are Chinese. Some are Korean. Some are Dutch. It's crazy and no one has ever arrested a cargo vessel because some kid got injured by a broken bike seat on a bike that was shipped on the vessel"

But now the article has come out and it is ALL WRONG:

“If there’s any asset of a corporate defendant against whom we have a judgment, we would ask the court to enter an order and federal marshals would seize those assets,” Weinstein said. Other attorneys in the case have voiced similar opinions.

But international law attorney Dan Harris of Seattle, who writes the China Law Blog, believes that idea is insanity.

“If (Weinstein) thinks the U.S. courts are going to be willing to destroy international trade on this issue, I wish him all the luck in the world,” Harris said. “Think about it. Say you fly up to Seattle and you punch me. Should I be able to seize the airplane you flew on?
“It’s absurd. It’s lunacy. And some of these shipping companies are huge. Some are not Chinese. Some are Chinese. Some are Korean. Some are Dutch.”

I fired off the following email to the reporter a few hours ago, but have yet to hear back:

Mary,

Your article regarding my quote is all wrong and here’s why.

1. It talks about seizing ships.
2. Weinstein then talks about seizing assets that belong to the defendants.
3. Then I say Weinstein is crazy.
4. I never said Weinstein is crazy.
5. What Weinstein is saying about seizing assets is not crazy at all. It makes complete sense.
6. What is being said (not by Weinstein) about seizing the ships is what is crazy.

Would you please correct that as soon as possible and would you please forward this email to Scott Weinstein so he knows that I certainly never meant to diss him.

Thanks.

Dan

I cannot find Scott Weinstein's email address, so I am going to use this post to apologize to him. Mr. Weinstein, your plan to use the United States judgment to seize assets around the world makes perfect sense to me. If you are planning to seize the ships hauling those assets, I would have issue with that. I never called you crazy. I never even thought you were crazy. In fact, before I read the article in which I called you crazy and then did an internet search on you, I did not even know who you were. I still do not think you are crazy and I certainly apologize for there being an article out there in which I am quoted as calling you crazy. I have written the reporter asking her to change the article and I am next going to write some of the editors at the paper itself in an effort to get the article changed. I am sorry this has occurred.

For more on Chinese drywall and on enforcing US judgments against Chinese companies, check out the following:

-- Who Needs International/Foreign Law? Not Us, We're Americans

-- Suing Chinese Drywall Manufacturers. Why All The Bother?

-- Will Your US Judgment Be Enforced Abroad? Not China, But Maybe.

-- Enforcing Foreign Judgments in China -- Let's Sue Twice

-- Taking Judgments To China (And Korea), Let's Not Sue Twice

-- Chinese Drywall. If You Think That Is Bad.....Just Wait

-- China Law. What's Insurance Got To Do With It?

-- Chinese Drywall Cases. Show Me The Money!

UPDATE: Scott Weinstein contacted me and he and I have spoken. He told me that as soon as he read the article he knew what had transpired and he never believed I had meant to call him crazy. He has read the blog post and he too has contacted the Fort Myers paper to express his disapproval.

Please note that in the original (very much rushed version of this post), I inadvertently referred to the Sarasota paper as having made this mistake. It did not and I have since apologized for that as well and corrected the post.

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Until a few years ago, English language trademarks were relatively easy to secure in China. We would figure out the right trademark category or categories under China's trademarking system, we would pick the right classes within the category(ies), and then we would get approval from the China Trademark Office to file the particular trademark. Then we would wait for the actual trademark registration to issue.

The rapid increase in trademark filings in China over the last few years has made filing for a trademark in China much more difficult. Let me explain.

In the old days, once we had counseled our client on what China's Trademark Office allows and does not allow as a trademark, we were able to secure registration of virtually every English language trademark we sought to file. China's Trademark Office would approve virtually everything for trademark registration because it did not consider the trademark we were seeking to file would likely cause confusion for the average Chinese consumer. In other words, what we were seeking to have registered as a Chinese trademark was different enough from all existing Chinese trademarks in the same category so as not to cause confusion for Chinese consumers.

But with the onslaught of trademark filings in China, we are now quite frequently having to go back and tell our clients either that there is no way their proposed China trademark will be accepted by the China Trademark Office or that there is at least some or a good likelihood that it will not. At that point, we work with them on deciding whether to go forward in trying to secure the trademark or in trying to come up with a new one.

In many cases, what the Chinese Trademark Office considers likely to cause confusion will be very different from what most English speakers would expect. The problem arises from the fact that English language names and Roman alphabet acronyms are viewed by the China Trademark Offices as images. So if you are seeking to register something like the word "Aviation" as your trademark and someone else has already registered the word "Avatar" as its trademark in the same category for which you are seeking to register "Aviation," there is at least a decent chance the China Trademark Office will refuse to register your "Aviation" trademark. It might refuse to register the name "Aviation" in China because it might see it as being too close to the already registered "Avatar" trademark and therefore likely to cause confusion for the average Chinese consumer.

This also has been happening fairly frequently with acronyms and made up three letter names. As an example (based on a number of trademark matters we have handled, but completely made up for this post), let's say you want to register the trademark "ABC" in a particular category. You go to the Chinese Trademark Office and request it register the trademark "ABC" in the China trademark category you have chosen. You have done the trademark search in that particular category of Chinese trademarks and have found that nobody has yet registered "ABC" as a trademark within that category and you are not anticipating any problems. But you almost certainly do. There is a very good chance the Chinese trademark office will reject your "ABC" filing because it is too close to a previously filed trademark, such as "CBA."

Now I know all of this probably sounds crazy to you as an English speaker, but when you really think about it, it is not.

If you are fluent in English, 'Aviation" is one word and "Avatar" is clearly another. And if you are fluent in English, "ABC" is nothing like "CBA." But if you are the average Chinese consumer, (which means you do not read English) and you see these four "items" as nothing more than images, then it is not so crazy to think that there might be confusion between the words "Aviation" and "Avatar" and between "ABC" and "CBA." And since confusion to the average Chinese consumer is the standard and since that is the standard by which China's Trademark Office determines what trademarks it will and will not register, it is really not so crazy after all.

So what can you do if you want to register "ABC" and the Trademark Office will not allow you to do so because it views "CBA" as confusingly similar? You can appeal to China's Trademark Review and Adjudication Board (TRAB) and if you fail there, you can take it to the Chinese courts. The key is usually showing/proving (oftentimes through consumer surveys) that the Trademark Office was wrong about the likelihood of confusion for the average Chinese customer.

Chinese trademarking.....not so easy any more.

What have you been seeing out there on this?

UPDATE: Stan Abrams over at China Hearsay did a post on China trademarks as well today, entitled, "China Trademarks: When Similar Ain’t So Similar," in which he analyzes a few examples of similar looking names and logos to determine whether they violate China trademarks.

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The other day, I instructed a client of mine from doing something I was pretty certain would violate the Foreign Corrupt Practices Act (FCPA). When I told him that what he was proposing would almost certainly be illegal, he assured me that in the country in which he would do this, this sort of thing "goes on all the time" and, "of course, there can be no way I can get in trouble in the US for doing something like this overseas."

I explained the FCPA to him and he decided not to do what he had been planning on doing.

The amazing thing about this is that he is a very savvy international businessperson and he had never heard of the FCPA and he had been operating under the assumption that he would only be bound by the laws of the country in which he was actually operating. I thought of this today while reading, "The All-In-One FCPA Enforcement List," over at the FCPA Blog. This post lists pending FCPA prosecutions and I wonder how many of the people on that list simply did not know that their actions might subject them to criminal prosecution in the United States.

I know that for many of you, this post is incredibly obvious, but I also know that there are many people out there for whom this post will come as a complete surprise.

Bottom Line: When operating overseas, it is important to know the laws of both your home country and the country in which you are operating.

For more on staying out of jail while doing business in or with China, check out the following posts:

-- Understanding China FCPA Risks. Who Is A Foreign Official?

-- The FCPA And China. Do I Need To Get All Loud On You?

-- The Foreign Corrupt Practices Act. Can You Say China Relevant?

-- China's Anti-Bribery Laws Rising

-- Avoiding Chinese Jails. I'm Talkin' To You.

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CNN has an article on how business for Virtual Private Network (VPN) software companies is booming these days, thanks largely to China and Iran. The article is entitled, "Cashing in on Internet Censorship," and it discusses how foreign companies are profiting from software that allows circumvention of government internet controls.

The article quotes co-blogger Steve Dickinson as saying those businesses offering up their firewall avoidance software in China are violating Chinese law: "Steve Dickinson, a China-based lawyer with Harris & Moure, an international business law firm, said that companies supplying VPN products in China are technically breaking Chinese law." But then Steve points out how this hardly matters because those doing the violating are not in China:

"China has no jurisdiction over such persons. As long as they do not physically enter China, there is no risk," he said in an email to CNN.

Completely true and more relevant than people realize.

There are a number of internet businesses that are legal in their company of operation but illegal in one or more countries in which they are actually doing business. I know that many years ago, there were internet businesses selling medications from countries in which a prescription was not required into countries (like the United States) where a prescription was required. The US government then tricked some of the people behind these companies to come to the United States, where they were arrested. Not saying the same thing is going to happen with respect to people at the companies selling illegally into China over the internet, but it might. Let's just say that if I were the president of one of these VPN companies, I would at least think long and hard before going to China. And if I were super paranoid, I might even want to know which countries might or might not extradite me to China.

While on this subject, I just read a very interesting post, entitled, "What If...." over at the China Outsider blog. The what if is Google offering and widely publicizing a free VPN. I would love for the technologically savvy to read that post and answer some of the questions posed there. Am I wrong in believing it would be relatively easy for China to block access to such a network, without really impacting anything much else?

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A couple weeks ago, I did a post entitled, No IP Enforcement In China. That Cannot Be True, in which I talked about how it is just not true that Chinese courts will not enforce a foreign company's intellectual property rights against a Chinese defendant.

I then discussed a recent high profile and high damage case won by a British tea kettle company, ,and concluded that post by saying that the "next time someone says China never enforces patent rights held by foreigners, you tell them that cannot be true.

Seems I am not the only one who thinks so as the Wall Street Journal just ran an by Jones Day attorney Benjamin Bai, entitled, "Yes, China Does Protect Intellectual Property: Multinational companies just need to take better advantage of opportunities to defend their patents."

The article notes that "the picture isn't as bleak as you might think" and that [t]he key is for foreign businesses to understand how IP protection works in China and to take better advantage of the protections that exist." It then notes how patent applications in China grew to 947,000 in 2009 from 252,000 in 2002, making the Chinese Patent Office the third-busiest patent authority in the world, after Japan and the United States. China also is now the most litigious country in the world for IP disputes—with 24,406 suits filed as compared to about 8,000 in the U.S.

Foreigners have been slower to embrace Chinese patents and Bai thinks this is because they wrongly believe they cannot prevail in IP litigation in Chinese courts:

But foreign companies can also win in Chinese courts. Neoplan, a German bus company, won an award of $3 million in January 2009 against two Chinese companies for their infringement of its design patent on buses. This case represents the largest infringement damages award ever obtained by a foreign company in China and compares well to the average patent infringement damages award of less than $50,000. Last month, a Beijing court ordered two Chinese companies to pay a combined $1.3 million in damages to a British manufacturer of electric kettle components.

Anecdotal evidence suggests the recent win rate for multinational companies in IP suits in China has been greater than 50%. In some cities the win rate exceeds 90%. While it may be premature to declare victory based on these statistics, they do suggest that it is a mistake to assume that multinational companies cannot win IP suits in China.

Foreign companies just need to know how to take advantage of these trends. Too many have made the mistake of not applying for patents and trademarks in China. Foreign patents and trademarks are not enforceable in China, just as Chinese patents and trademarks are not enforceable in the United States. Multinationals also should be willing to enforce their Chinese IP rights against infringers. Litigation success requires more than a mere willingness to sue. An in-depth understanding of the Chinese judicial system and relevant legal doctrines and an ability to maneuver through the intricacies of law and politics in China are essential for foreign companies enforcing IP rights there.

I agree.

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Article I wrote for Advertising Age/Ad Age Chinais now online. It is entitled, "Four Tips to Avoid Breaking the Law in China" and though its focus is on the legal issues that arise from marketing in China, it (if I do say so myself) does provide a good, though very basic, foundation of the common legal issues foreign businesses face in China.

I urge you to go to either Advertising Age/Ad Age China to read the full article, but to whet your appetite, I leave you with the sections on intellectual property and contracts:

Intellectual Property

China does a pretty good job of protecting trademarks, but the only trademarks it protects are those that have been registered in China or that constitute a "well-known" mark. If your client's brand name is not as well-known in China as Coca-Cola (and it is only within China that matters), you should just assume that registering it in China is the only way for you to protect it.

Because China maintains a "first to file" trademark system, the first to file for a trademark almost invariably becomes the owner of that trademark. So you must register before anyone else.

As a rule, a company should register its brand as a trademark in China before marketing it. If it markets the brand before registering, the odds are good that someone else will register that brand as its own. Many American companies have gone into China, marketed their brand, and then had to forsake it because someone else went ahead and registered it first. Trademark first, then market.

You should also consider securing a .cn and/or a .cn.com domain name.

And be aware that China, unlike many countries, provides for portrait rights, which means using someone's portrait for profit and without their consent is prohibited. So make sure you have a written agreement.

Contracts

In the U.S., important provisions left out of a contract will usually be implied by a court, whereas provisions left out of a China contract are usually treated as though they do not exist.

Here's a great example: a U.S. company purchased and received a large shipment of laptop cases from China, which featured handles that nearly always broke when used to carry a laptop. The Chinese manufacturer insisted it had provided exactly what had been ordered, and if the U.S. company had really been concerned about the handles not breaking, it would have purchased the Chinese company's $4 bags -- not its $3 bags.

In other words, the U.S. company should have specified in its contract that it would require the laptop bags be strong enough to hold a laptop.

Clarity and specificity in China marketing agreements are equally important. For instance, if you are paying to put your logo on a stadium, specify that you want it to be a particular size, on a particular wall, at a particular height, and there at particular times. If you want exclusivity, specify exactly what you mean by that.

Signing an "exclusive" contract with a stadium may mean exclusivity for one wall, when you thought you were getting it for the entire stadium. Figure nothing is implied.

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The Asia Business Media Blog just did a post, entitled, "China's attitude shift," on a James McGregor talk Woodward attended today in Hong Kong.

McGregor, a "journalist, media entrepreneur, investor and long-time resident of China gave a sobering talk" on how China is beginning to treat foreign businesses in its midst:

McGregor says that he loves both countries, but he thinks there has been an unsettling attitude shift in China recently. He believes that the arrogance that was once a less-than-appealing feature of U.S. businesses abroad has been adopted by the Chinese at an alarming rate.

Some of McGregor’s other observations included:

- A belief in “exceptionalism,” which was once an American position, is now common amongst Chinese business leaders and officials.

- More than ever before, Chinese authorities are moving to implement regulations to rig markets in favour of Chinese businesses. These regulations are designed to replace foreign businesses.

- “Indigenous Innovation” is a policy gaining traction at all levels of government in China. McGregor notes however, encouraging innovation which is protected from global competition by a net of regulations is not a plan that is likely to succeed.

- State-owned enterprises are enjoying a resurgence as Beijing has rediscovered its interest in maintaining an economic constituency that it can count on and control. Privately-owned Chinese businesses are beginning to feel they are at a disadvantage in their own country.

This is pretty much on all fours with what we wrote at the beginning of this year in a post entitled, "With China's New Standing Come New Errors:"

With China being hailed as the world economy's savior, its government has concludedthis is its century. The West is irrelevant and China will lead a vanguard of new players -- and the game will be played by Beijing’s rules. Particularly in the area of trade and investment, China hopes to jettison the constraints of world trade law for a return to the policy of national interest and raw power. In this new world order, Beijing sees little need for foreign economic or technical assistance.

From the standpoint of foreign investors in China, this new self-image is already having a significant impact:

• Applications for wholly foreign owned enterprises (WFOEs) and joint ventures are more often being delayed or denied by demands for documents or capitalization not required by law. Officials openly state they are no longer interested in encouraging foreign investment.

• Registration of technology licenses is either prohibited or restricted in direct violation of law. The idea is that Chinese business should no longer be required to pay for access to foreign technology.

• Visas for foreign workers are increasingly being delayed, denied or restricted. The position is that Chinese workers are available to do any job.

• Investments in China used to be falsely profitable as foreigners qualified for tax breaks unavailable to domestic businesses while employment and wage rules were not enforced. This position has completely reversed. Chinese and foreign companies are expected to operate under exactly the same rules, making many foreign ventures unprofitable.

As China lawyers, we have certainly been "feeling it" and though I will not get into specifics, I can say that in the last few months we have encountered a number of instances where we have filed applications/registrations 100% pursuant to law and in the very same way we have successfully done over the last few years and some Chinese government officials are telling us to do more. And when we point out that we have already done everything required, we are told that doesn't matter. We have yet to be denied anything in the end, but there is absolutely no doubt that the legal hoops foreign companies are being required to jump through in China have, in many instances, been raised.

Are you seeing the same thing?

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I hate it when I have to get all philosophical, but since China Tax Insights has thrown down the gauntlet, I feel I must. What is an international lawyer and what exactly do international lawyers do and what exactly should international lawyers do. Please bear with me here as I swear this post is going to be very relevant to more than just navel gazers and lawyers.

Here goes.

Matthew McKee over at China Tax Insights did a post, entitled, "What is an International Tax Lawyer?" His post was actually a riff on a post I did about a year ago where I stated the following about international tax:

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.

I am always amazed when lay people think they can do what I do but I am always even more amazed when lay people think they can do what other lawyers do even though I know that despite all of my training and experience, I would not do those things even if paid.

Matthew, who is himself an international tax lawyer, then says he agrees with what I said above. Matthew then complains of a comment left on my post that seems to say that I should have been talking about "tax specialists" who focus on off-shore trusts.

Matthew then provides an excellent definition of what constitutes international tax, which only slightly modified, also defines what I see as constituting international law:

In defining the concept of international tax, I can't go past Michael Graetz (probably the foremost expert on international tax policy) who said that the ‘basic task of international tax rules is to resolve the competing claims of residence and source nations’. [1] Accordingly, international tax laws are those rules that delineate a country’s taxation of cross jurisdictional income. This includes transfer pricing provisions, thin capitalisation issues, tax residency questions, income source etc.

Accordingly, I consider an international tax lawyer to be a lawyer who regularly gives advice on such rules. Whether that lawyer is an expert in another country’s tax laws is not relevant. Just as with international trade lawyers, who don't have a detailed understanding of the trade rules of each country, international tax lawyers don't know the tax rules of each country back to front. However, international tax rules, as with trade laws, are sufficiently similar that, for example, a US tax lawyer with expertise in international tax (a US international tax lawyer) will know what the issues will be and know when such issues are sufficiently complex such that questions need to be asked from appropriate professionals in other jurisdictions. That is, ultimately, all one can ask.

I love it. I particularly love it because a few weeks ago, I was asked by a client whether my law firm was the right firm for a particular task and it took me some thought and some discussion in the firm to decide that we were not. More on that decision and how it relates to this post in a minute.

Matthew then talks about how the bulk of his business involves cross-border business and the tax issues spawned from that and how he rarely gives advice on off-shore trusts. He then talks about where accounting principles (raised in the comment Matthew did not like) fit in with international tax law:

Further, given that the client [the one who sent me the China-US tax treaty article] was referring to an article on the US-China DTA, I can't see how the interaction between two sets of accounting principles was the relevant the issue. Before we worry about accounting principles, which assist in determining the requisite amount of taxable income, the first issue is to establish liability. In terms of Chinese investing in the US, the first point to start is to look at both the domestic tax laws of the respective countries to determine how they treat the income and then to look to the DTA to see whether it alters the standard position. In many cases, the DTA will prevent one country from exercising its taxing rights over certain income. Domestic tax specialists have little experience in interpreting international tax provisions of domestic tax laws and DTAs hence why Dan was right to discuss tax lawyers with experience in international tax issues. Once it is established that there is liability for taxation in the US for a Chinese company, then the issue of the interaction between accounting principles will become relevant.

I like Matthew's definitions because they so much apply to how I see what my firm does and does not do. However, rather than give an overarching definition, I will give examples.

1. US domestic family lawyer calls us because he needs proof of a divorce from Perm, Russia. Our in-house Russian licensed lawyer uses her Russian lawyer network to certified court documents proving the divorce. She then does a declaration in English for the US Court, explaining how she obtained the documents, what they say, and why they matter.

2. Long-time Eastern European client gets sued for divorce in the United States and comes to me and tells me to handle it. I know little to nothing about divorce law and so I bring in a top US divorce attorney to handle the US side and my client gets an Eastern European divorce lawyer to handle the Eastern European side. I formulate the idea of moving the US Court to move the entire divorce proceedings to Eastern Europe and then assist the US divorce attorney in drafting the motion, which motion is granted by the US court.

3. Someone calls me to help them with their estate planning involving properties in China and in the United States. I refer them to an estate planning lawyer with experience in international estate planning.

4. Client asks my firm to draft terms and conditions for their internet product sales. This company will be selling product all over the world, but not in massive quantities. We talk about how we can draft separate terms and conditions tailored for the top twenty or so companies in which it sells products and how to do that, we will need to bring in lawyers from each of those twenty countries. We also talk about how my firm can draft one set of terms and conditions to apply everywhere. Because these terms and conditions are not country specific, some of them may be invalid in some places. Client chooses the one set for all countries approach.

5. Client is owed money by a Japanese company. My firm has a lot of experience with Japan and with Japanese lawyers and two of our own attorneys speak Japanese. We take on the case for the American company and hire appropriate Japanese counsel to pursue the case. We work with the Japanese lawyers on the case until settlement.

6. Company calls us to assist in collecting on money owed by a company in Egypt. Because my firm has no meaningful experience with either the Egyptian legal system or with Egyptian lawyers, we decline the case. As a favor, however, we tap our network of international attorneys and give them the names of Egyptian attorneys who were recommended to us.

7. Company asks us to assist them with their software licensing agreements in Russia. This is the tough one I mentioned above. I think long and hard on this one because we have substantial experience in drafting contracts with Russia, we have in-house Russian law expertise, and we have done many software licensing agreements. In the end, however, I decline the work because software licensing agreements are so country specific and we are not expert in Russian law relating to software licensing. This company has its own in-house lawyer and I figured he could oversee the Russian lawyers himself, without need for us. If this company did not have its own in-house lawyer, I probably would have suggested we handle the US side for it.

8. Client calls wanting our help on a technology licensing agreement with an Indian company. My firm has done probably hundreds of international technology licensing agreements, but since we have no expertise with India, I refer it out.

9. Client calls wanting our help with a product sales agreement involving the purchase of product from India. We handle it.

10. Client calls wanting our help on a technology licensing agreement with a Spanish company. We handle it because we have a Spanish licensed attorney to help on the Spanish side.

11. Client calls wanting our help in reorganizing its ten international companies, seven of which are in countries we know well, and three are in countries we know less well. We take it on.

I could go on and on but the reality is that many of international law projects can be staffed with anywhere from one to hundreds of attorneys and the staffing will often depend on the money at stake. If someone were selling a $200,000 piece of equipment to Russia, my firm would handle it with an international lawyer and our in-house Russian lawyer. But if it were a ten year agreement to sell $100 million worth of equipment to Russia, we would urge the client to pay for us to bring in a top flight Moscow lawyer to handle the Russian side and to work with us on the international side.

I would guess Matthew does a similar analysis on tax matters.

So then what does it take to be an international lawyer? I am constantly getting asked this question by law students and young lawyers and so here goes.

First off, if you have not already done so, I strongly urge you to go read, "Wanna Be A China Lawyer? Creeps Need Not Apply." That post sets out what my firm typically looks for in terms of personality and background and I do not think we differ all that much from most firms. This post though will address more what it takes for young lawyers to take their practice international.

Young lawyers at other firms often complain to me of how their firm does not put young lawyers on international deals or on international litigation or arbitration matters, expecting me to commiserate with them. I don't. I instead tell them how international deals and dispute resolution are, at their core, pretty much the same as domestic deals and dispute resolution and that it does make sense to first master the domestic side. International law involves pretty much the same issues as domestic law, with a whole bunch of additional issues in addition. Those additional issues can involve the very different laws or culture of a country involved in the deal or the dispute or they can involve issues that arise simply because the matter implicates more than one country. But the first and most basic thing one needs for practicing international law effectively is a good grounding in the practice of law and the best and fastest way to get that grounding is to start out on domestic matters. Sorry.

So what do you think?

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I am a fanatical about abiding by the laws in whatever country I am in, not because I necessarily like the laws, but because I do not want to go to jail. I do not know whether we Americans are more arrogant about our own country's reach than those from other countries (though I suspect that we are), but there do seem to be far too many Americans who mistakenly believe some or all (or at least some variation) of the following:

1. If it's legal in the United States, it's legal everywhere;
2. If the United States goes easy on it (marijuana possession, for instance), every other country also goes easy on it, or at least will go easy on it when it is an American involved;
3. If it is legal in the United States and illegal somewhere else, well then surely that somewhere else is acting silly and will come to its senses when a good American lawyer explains to them how things should be;
4. And, if worse comes to worse, and an American commits a crime overseas, the US government will fly them home to mommy and daddy.

None of the above are usually true, though in some cases if you are accused or convicted of a crime overseas, you might be able to get your local newspaper to write an absurd editorial or, if you are extremely wealthy, you might be able to get Senator Patty Murray to write a letter to President Obama asking him to "raise the issue" of your detention. In other words, if you are charged with a crime overseas, you are pretty much on your own....even if you are an American. [FULL DISCLOSURE: My law firm is involved in two law suits against Global Fishing, the owner of which on whose behalf Senator Murray felt "called upon" to intervene, including this one for $5.8 million, plus interest.]

That was in stark evidence today as a Haitian judge ruled that ten Americans who went to Haiti and allegedly scooped up a bunch of Haitian children and drove with them to the Dominican Republic border. The media are saying that many of the kids were not orphans and that the ten Americans had no legal basis for taking the kids or for trying to cross the border with them.

For more on the criminal side of living and doing business in China, check out the following:

-- "Avoiding Chinese Jails. I'm Talkin' To You." (this post contains a whole host of great tips for making sure you stay on the right side of the law in China)
-- "Amazing Lawyers and The Criminal Side of China Business"
-- "Criminal Law and Business in China -- A Strong Caution"
-- "Foreign Partners In China Crime Do The Time"
-- "Bad China Products. Hey It's A Criminal Thing"
--"Bad China Products. Hey, It's A Criminal Thing, Part II"

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With sushi restaurants, it's the yellow fin.
With new houses, it's the windows.
With international contracts, it's the dispute resolution provision.

The "it" I am talking about is the one easiest, fastest, most accurate, way to judge whether something is good or not. And the way I judge international contracts is by heading straight to the dispute resolution provision. The well crafted provision is, above all else unambiguous. If it calls for litigation, it says where it will be and what law will apply. And it says who will pay for it and under what circumstances. If it calls for arbitration, it says where it will be, how many arbitrators will be required, how the arbitrators will be chosen, the language of the proceedings, and the law that will apply. And it says who will pay for what.

The above are minimums.

I am heartened to see I am not the only blogger obsessed by these provisions. My friend, Santiago Cueto, of International Business Law Advisor, recently did his own post on international dispute resolution clauses, entitled, "7 Ways to Bulletproof Your International Arbitration Agreement."

Santiago starts out by setting forth some very sound reasons as to why arbitration usually makes sense in international contracts:

As an international business attorney, a focal point of my practice involves advising clients how to best handle cross-border disputes. The most effective mechanism by far in resolving international dispute is international arbitration. Why? International arbitration levels the playing field by taking away the home court advantage of parties on either side of a transaction.

But the most attractive aspect of arbitration is that the awards issued by an international arbitration tribunal will receive worldwide recognition by countries that are members of one of the international conventions on the enforcement of tribunal awards.

I would add, however, that in dealing with China, there are definitely times where litigation may be preferable to arbitration. In particular, if we see in-China IP or trade secret violations as being the the biggest threat to our client, we oftentimes choose a Chinese court as the forum for dispute resolution. Also, there are times where you want to make dispute resolution as difficult, as expensive, and as drawn out as possible so as to dissuade your counterpart from ever engaging in it. In those instances also, arbitration may not make sense.

Santiago then sets out a nice checklist on how to "bullet-proof" an arbitration clause:

1. Be Unambiguous. Unequivocally state that any dispute will be resolved through arbitration e.g. “Any dispute or difference arising out of or relating to this agreement shall be finally resolved by arbitration …”

2. Be Clear. Define whether arbitration is to be preceded by negotiation or mediation and designate a time frame e.g. “If no agreement has been reached within __ days of the delivery of written notice of the existence of a dispute, either party may serve a request for arbitration …”.

3. Be Specific. Specify the administering institution and the rules to be applied e.g. “The arbitration shall be administered by the International Center for Dispute Resolution in accordance with its International Arbitration Rules.

4. Be Careful. Carefully select the site of the arbitration taking into consideration the quality of its arbitration jurisprudence and the respect of its courts for the arbitral process. e.g. China, no. Hong Kong, yes.

5. Be Meticulous. Meticulously set forth the number of arbitrators on the panel and how they will be selected. Choose an arbitrator who demonstrates communicative proficiency, a firm appreciation of the rules of evidence and an acknowledged expertise in the industry in which the dispute arose or about the issues in dispute.

6. Be Heard. Designate the language of the proceeding. It is unsettling how many times parties overlook this provision and are forced to rely on a foreign translator to communicate every word of the proceeding.

7. Be Final. In order to prevent further review and appeals of an arbitral award once it is rendered, you must include a statement in the arbitration agreement that clearly states that the award is final e.g. “The arbitral award is binding, final, not subject to review, and not subject to appeal by the courts in any jurisdiction." This provision is particularly essential in jurisdictions where the laws allow parties to appeal an award issued in that country.

I disagree with Santiago's stating "China, no" as there will definitely be times when you have no choice but to say yes to China arbitration. In those situations, you should call for the language of the arbitration to be in English and you should require that as many of the arbitrators as possible come from outside China. If you have an English arbitrator and your arbitration is in English, applying the laws of England, it hardly matters that it may be taking place in Shanghai under CIETAC and not in Hong Kong.

Bottom Line: Arbitration provisions often end up being the most important provision in your contract so give them the strategic thought and consideration they deserve.

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Spoke with a client today regarding IP protection in China. I gave my usual speech on China's protection of intellectual property, which, very briefly summarized, goes something like this::

IP protection in China is admittedly not that great, but it is better than widely portrayed. If you are selling movies on DVD or software on CD, then it is every bit as bad as you have no doubt heard. If you want to register and then enforce your patent there, do not expect your protections to be as good as the United States. But one thing we should very seriously talk about is how we can help protect your technology in China through trade secret/confidentiality agreements and through trademarks, both of which have a pretty good record of being enforced in China.

My client then said he has heard the Chinese courts never enforce patents held by foreigners. I told him that though patents are definitely not as strong in China as in the United States, the idea that foreigners can never protect their patents in China is just not true. A few hours later, an article, entitled, British victory in China as patents dispute boils over showed up in my email box.

The gist of the article is in its first sentence: "The British company whose founder invented the kettles that switch off automatically when they boil has had China patents win." The British company is Strix, whose founder John Taylor, invented the "kettle control" and who, today, makes most of its products in Guangzhou, China. Strix learned that two Chinese companies were copying its China patented technology and it sued those companies and was just awarded USD $1.5 million against them by the Beijing No. 1 Intermediate People's Court. Of equal importance is that the Court froze defendants' "liquid assets, including the bank accounts" at the commencement of the lawsuit a year ago, pretty much ensuring Strix will be able to collect its judgment.

So next time someone says China never enforces patent rights held by foreigners, you tell them that cannot be true.

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When the media and the blogosphere started going crazy writing about China's plans to ban the eating of dog meat, I made very clear to myself that I was going to stay out of it. There was just no way I was going to join that bandwagon. First off, I just did not see it as a big deal. More on that below. Secondly, I have always hated the whole dog meat issue because when Westerners discuss it, they so often do so in an irritatingly self-righteous and ethnocentric (please note this is the first time I have used this word on this blog) way. More on that below also.

So why then am I writing about it now? Because I long ago vowed that whenever I get at least three emails from readers requesting I write about a topic, I will do so, and my third one just came in:

Dan,

I know you don't eat meat so I am surprised you have not written anything about China's new law on the eating of dog meat. Do you see this as China's become more humane? Will the law be enforced or is this just being done for PR?

No, no, and no.

I feel I must set out my bona fides at the outset. I love dogs. They are my favorite animal by far. I am a dog person. On top of that, I have not had a bite of meat for 17 years. Not one. I do NOT consider those who eat meat any less moral than I am. Two reasons for this. One, eating or not eating meat is just one small aspect of a person's morality and I absolutely can understand those who thing it is no aspect at all. Who is more moral, a vegetarian serial killer or someone who eats meat but devotes their whole life to helping the homeless mentally ill? Who is a better "environmental steward, a vegetarian who owns a massively polluting factory that engages in illegal dumping, or someone who works for Greenpeace and walks everywhere? Two, I know very few people well enough to be able to judge their moral standing and that kind of judging just ain't my bag.

The new laws will also deal with animal cruelty issues, which I view very differently than the provisions on dog meat.

Many years ago, I was at lunch with a group of law students after having given a talk at their school. When my meat free entree arrived, one of the students launched into a mini-speech about how great it was that I was "such a steward of the earth." As soon as she finished, I jokingly said that I did this to make up for owning two large Hummers and not recycling a thing (neither true but said for effect). This poor student looked horrified, but everyone else laughed. I felt only a little bit bad.

So I see just cannot ascribe much at all to whether a country eats dog or not. I also cannot see any real difference between eating dog meat or any other meat. Where does horse meat fit on the moral scale? Are countries that eat horse meat (France for example) less culturally developed than those that do not? Does anyone disagree with me on this? Or should the cuteness or friendliness of the cut count towards the morality of the eating? The US is not necessarily more sophisticated, not necessarily more moral, not necessarily more advanced than countries in which dog (or horse or whatever) meat is eaten. In France they love mussels, yet clams are generally considered dirty. It's a cultural thang.

I once had a dog meat discussion with some Koreans who complained of how Americans act as though all Koreans are "horrible people" because some eat dog. They told me that their retort is to point out how badly the US takes care of its homeless humans. Touché.

I have been to Korea so many times that the Westin Chosun in Seoul had a mini-celebration for me on my 100th stay there about five years ago. And though this happens less often than it did, I still occasionally encounter someone who wants to let me know that they would never go to Korea "because they eat dog there." My favorites was when a butcher told me this. I kid you not.

So here is how I see China's plans to ban dog meat.

I do not think China is doing this to placate the West. I think China is doing this because dogs are becoming increasingly popular pets in China among its wealthier citizens and this planned ban is a great way to placate them. I do not see it as a sign of anything else.

There is a saying on how the Chinese will eat anything "with four legs that isn't a table, anything that flies that isn't an airplane, and anything that moves that isn't a bike." Apparently dog is an exception.

What do you think?

UPDATE: Someone pointed out to me that I failed to distinguish between eating endangered animals and animals that are not threatened or endangered and that this distinction proves my thesis wrong regarding the cut of the meat being irrelevant in terms of determining morality. I agree that I should have excluded endangered and threatened species when I talked about not being able to see any difference between eating one animal as opposed to another.

ANOTHER UPDATE: Nice post on the topic of animal rights in China at the China Geeks blog. Makes the important point (though one that should be unnecessary) that, hey, not all 1.3 billion people in China think alike on these issues.

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I love this post. It speaks to me. Stan Abrams of China Hearsay wrote a post on Chinese law, entitled, "Shenzhen’s ‘Floating House’ - My New Example of Administrative Uncertainty in China." The post is about the floating house pictured below, which house cost USD$15 million:

Stan sees this house and what has been happening with it as a perfect illustration of China's legal system. I so agree.

The house in Stan's post cost nearly USD$15 million to build and it is right now at risk of being demolished by the government because it was built without the proper building permit. The house's owner, however, claims it to have been built legally because it had the approval from Guangdong's oceanic administration

The law professor in Stan sees this house as nicely illustrating the following:

1. Federalism - one of the most important topics in China law. Note that the floating house guy apparently went to one agency for approval and may be shut down by another part of the government. This is common and sometimes difficult to avoid.

2. No applicable law - the developer says that the law didn’t cover what he wanted to do, so he obtained what he could from the government and moved ahead with the project.

I see this a lot with new technology. It’s painful from a lawyer’s perspective, when you essentially have to tell a client “Sorry, the law doesn’t really cover this, and of course the government will not formally comment on the matter at this time.” Clients have a tendency to get pissed off at their lawyers when they can’t give them a straight answer on a regulatory matter. Ultimately it comes down to how much risk the client wishes to assume.

Of course, if something bad happens later on, it’s the lawyer who gets blamed for it anyway. (Budding lawyers out there: make sure your risk analysis is in writing and your client acknowledges your conclusions - in writing!)

3. National treatment - Foreign investors are not the only ones who have trouble with legal uncertainty and government approvals. The situation here involved a domestic property developer who (I assume) had enough juice to get a preliminary approval document from some part of the government. The document was worthless (of course), but the fact that he got it in the first place says something. A foreign company probably wouldn’t have gotten even that far.

Stan then admits he does not have "some perfect advice for foreign investors hoping to avoid these situations" and he rightly calls for "skepticism if any lawyer or consultant claims to know all the answers either."

Having said that, however, Stan sets forth what I see as the perfect (translated as best advice possible under the circumstances) advice for foreigners that might find themselves in similar situations -- and trust me, you probably will. Stan's advice is to perform thorough due diligence before "jumping in on deal that involves this sort of uncertainty" and to always "investigate the shit out of" your government approvals, particularly if issued by local authorities.

All true and I have three stories of my own to add.

1. Many many years ago, a company came to us for legal help with a big business it was planning to build (I am being intentionally vague here. Sorry). Early on in our due diligence, we realized that the land on which the hotel was to be built could not in a million years be used for that purpose. Our client though told us that a VERY powerful governmental entity wanted the business built there and wanted our client to build and run it. So we as lawyers told them, in writing of course, of how their business was both illegal and risked being shut down as soon as it opened. Despite this, our client chose to move ahead with the project, having calculated that if it could stay open for a certain amount of time it would make enough money to justify the risk.

2. Many years ago (note how this is one fewer many than the previous one), a client came to us for assistance in getting foreign investors for a large scale renovation project it was going to be doing on a building it had bought and was converting into upscale offices. Early on in our due diligence, we discovered that the building was zoned for hospital use only and that investors would need to be alerted to that. Our client insisted we had to be wrong because the "local authorities" had sold him the building (for quite a lot of money, actually) and had made all kinds of promises to him. He was wrong.

3. Not all that long ago, a domestic US attorney contacted me with some tax questions regarding China joint ventures. I could not answer his questions off the top of my head, but I immediately recognized that the joint venture was nowhere close to complying with China's laws regarding the monetary contributions required by the foreign joint venture entity. The foreign entity would be contributing only intellectual property (IP) of an insufficient value. I told this attorney that the deal was illegal and the way it would likely play out would be with the Chinese joint venture partner ending up with the US company's intellectual property and the US company ending up with nothing. The domestic lawyer insisted I had to be wrong because the local officials were going to "help shepherd this deal through" and "there is no way they would engage in illegal activity." He then added that he "had met them and they are definitely not that kind of people." I sent a CYA email and said to count me out.

Bottom Line: If you are a foreigner in China, you cannot expect to work the system. Instead, you should assume the system will work you. Your defense to that is to follow the law to the letter and if the laws are in conflict, then know what your risks are and be prepared to weigh them against the rewards.

Got it?

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This is a guest post by Michael Carrier, professor of law at Rutgers University and author of the book, Innovation for the 21st Century: Harnessing the Power of Intellectual Property and Antitrust Law

In my recent book Innovation for the 21st Century:  Harnessing the Power of Intellectual Property and Antitrust Law (Oxford), I explore the relationship between law and innovation. In particular, I show how U.S. patent, copyright, and antitrust law often stifle innovation.

Dan Harris was kind enough to invite me to write a guest post for China Law Blog. And I am pleased to accept his invitation. But I must state at the outset that it is difficult to condense a 400-page book to a blog post! I don’t have the space here to discuss many of my proposals, including those addressing pharmaceutical mergers, standard-setting organizations, peer-to-peer (P2P) software, the Digital Millennium Copyright Act, statutory damages, biotechnology research tools, and material transfer agreements (MTAs).

But I can discuss three proposals that may be of interest to China Law Blog readers: a post-grant opposition procedure, a framework for relief in patent infringement cases, and a solution to anticompetitive pharmaceutical patent settlements. To be sure, China’s patent law (not to mention antitrust, currently grappling with the recent Antimonopoly Law) is not identical to that in the U.S. Just two examples are provided by China’s broader compulsory licensing provisions and greater hostility to business method patents. Nonetheless, given the trend of stronger IP protection in China in recent years, the challenges that have arisen in the U.S. could prove instructive.

My first proposal involves a post-grant opposition system. Such a system would address difficulties with the application process at the U.S. Patent and Trademark Office (PTO). The PTO has granted numerous invalid patents, and this problem has not effectively been addressed through other means, such as litigation or patent reexamination. A post-grant opposition system would allow any party to challenge a patent after it is issued. It would provide a quicker and cheaper determination of validity than litigation, and would target the most valuable patents. And it would allow the PTO to access important information held by competitors.

In the book, I set forth numerous details of my proposed opposition system, including (1) the threshold a challenger must clear to commence an opposition, (2) the timing of the process, (3) the grounds on which a patent can be challenged, (4) the nature of the required evidentiary showing, (5) the procedure’s judges and appeals, (6) the materials that can be introduced in the proceeding, (7) the disclosure of the requester’s identity, and (8) the preclusive effect of an opposition. Although China does not currently have a post-grant opposition system, its current invalidation regime (with its expansive grounds for challenge and greater petitioner involvement) is similar to my proposed system.

Second, I offer a framework for determining relief in cases of patent infringement. To be sure, China has not confronted the incidence of nonpracticing entities (often referred to as “trolls”) that has occurred in the U.S. Nonetheless, for most of the past quarter-century in the U.S., any patentee could receive an injunction that removed the product from the market. Such relief gave commanding leverage to the patentee to obtain settlements that greatly exceeded a reasonable royalty and reflected the significant costs of switching to alternative technologies.
In 2006, in eBay v. MercExchange, the Supreme Court made clear that courts should not automatically grant injunctions in patent infringement cases. But the Court did not make clear how future courts should decide these issues. In the book, I examine the post-eBay landscape, synthesizing the cases and offering a framework that provides guidance to courts in determining appropriate relief in patent infringement cases. I conclude that courts should grant injunctive relief when (1) the patentee competes with the infringer in the marketplace, (2) the patented technology is a core component of the defendant’s product, or (3) (in most cases) a party willfully infringes the patent.

When these elements are not satisfied, courts should examine other factors, which include the effect of injunctive relief on the public. Damages will be appropriate in certain cases, such as where a manufacturer inadvertently infringes a patented component making up a small part of a product and the public would suffer substantial harm from injunctive relief. Other than these settings, courts should apply a default rule that injunctive relief is the appropriate remedy for patent infringement.

My third proposal addresses settlements by which brand-name pharmaceutical firms pay generic companies to delay entering the market. These reverse payments, which differ from typical licensing payments that flow from challengers to patentees, may even exceed what the generic could have earned by entering the market.  Further raising suspicion, many of the patents are not valid. In the 1990s, generics won nearly 75 percent of their challenges to patents on drugs such as Prozac, Zantac, Taxol, and Plantinol.  In June 2009, the FTC predicted that consumers would spend an extra $35 billion over the following 10 years because of these agreements.

Despite the concerns presented by reverse payment settlements, U.S. courts have recently blessed them. They have explained that the agreements reduce costs and increase innovation. They have referred to settlements as “natural by-products” of the Hatch-Waxman Act. And they have pointed to patents’ presumption of validity in demonstrating the agreements’ reasonableness. Although the Federal Trade Commission (which enforces the antitrust laws in the drug industry) and scholars have voiced strong arguments against courts’ leniency, these have fallen on judicial deaf ears.

In the book, I explain why settlement agreements with reverse payments should be presumptively illegal. I apply the framework that the U.S. Supreme Court articulated in Verizon Communications v. Law Offices of Curtis V. Trinko, which underscored the importance in antitrust analysis of a regulatory regime covering the challenged activity. In particular, the Hatch-Waxman Act provides Congress’s views on innovation and competition in the drug industry, freeing courts from the thorny task of reconciling the patent and antitrust laws.
By encouraging generic patent challenges but also providing for patent term extensions and marketing exclusivity periods, the Act offered a delicate balance between competition and innovation. Unfortunately, mechanisms that Congress employed to encourage patent challenges – such as an exclusivity period for the first generic to challenge validity – have been twisted into barriers preventing competition. Antitrust can play a central role in resuscitating the drafters’ intentions and promoting competition.

Reverse payments also are concerning because of the parties’ aligned incentives. By delaying generic entry, brand firms can increase their monopoly profits. They can then use a portion of these profits to pay generics more than they would have received by entering the market. From an antitrust perspective, these payments for delay threaten to divide markets, a particularly egregious offense eliminating competition between rivals.

A framework of presumptive illegality promises to resuscitate the generic competition at the heart of the Act. Given the importance of the drugs subject to reverse payments and the far-reaching effects of skyrocketing health care costs, a more justified and aggressive framework for such agreements would offer significant benefits.

In short, these three proposals are representative of the frameworks I offer to change U.S. law to foster innovation. Although China’s patent, copyright, and antitrust laws are, to varying degrees, different from those in the U.S., my proposals nonetheless may prove instructive.

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Leslie Forman over at the Beijing Corporate Training Blog did an interesting post the other day regarding a conversation she had with a Chinese lawyer on creativity. The post is entitled, "Creativity in the Context of Chinese Legal Work" and it relates how this Chinese lawyer insisted Chinese legal work mandates against creativity. This morning, Leslie started a discussion on this topic over at the China Law Blog Group on Linked in, here.

The key lines from the post are as follows:

He [the Chinese lawyer] kept saying, “I’m not creative.” In his work, it is rare for anyone to make “Be creative” a chirpy imperative. Legal work depends on both established procedures and clients’ expectations, and it would be quite odd for a manager to insist on explicitly creative output.

Also, he mentioned that a Chinese manager would lose face if he admitted that he “himself cannot solve the problem in question.” In the rare circumstance that he would communicate such a thing, he would do so in a roundabout way that would both maintain his dignity and imply the desire for assistance.

Nearly a year ago, I said something similar in a post I did, entitled, "Working With Chinese and Korean Lawyers. The Big Four Issues With Each:"

The Chinese lawyer’s role is different. Chinese lawyers far too often see their role as doing what the client tells them to do, rather than telling the client what should be done. If a client calls me and says she wants to do A, my knee-jerk response is to ask why. The typical Chinese lawyer’s response is to say yes

Are Chinese lawyers really less creative (generally) than Western lawyers? If so, why?

I am not at all sure the division on creativity is a Chinese/American one. I actually find the division runs more along the lines of civil law versus common law countries.

What do you think? Also please feel free to discuss this here as well.

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Many years ago, I attended a Roosevelt High School versus Juanita High School basketball game. The big matchup was between two top 100 high school prospects, Marcus Williams for Roosevelt and Micah Downs for Juanita.

By that point, both Micah Downs and his father had already made clear they thought Micah was already NBA caliber (which he clearly was not) and that high school (he was now on his fifth one) ball was pretty much a waste of time for him. Roosevelt won the game, Downs played like a very good high school senior (not an NBA'er) and every single time he would touch the ball, the crowd would chant "overrated, overrated" and every time he would do something wrong, we would chant, "NBA, NBA."

Though I have nowhere to shout it (except maybe here), I am often tempted to shout "overrated" when my clients or others make it seem as though one cannot do business in China because of its rampant lack of intellectual property (IP) protection. That excuse is overrated.

The reason it is overrated is because so many of the companies worried about protecting their IP in China do not really possess any IP in the nature of patents or copyrights. The issues they are concerned about fall more into the category of cutthroat competition than IP protection and those issues are usually best handled not through IP registration, but through Non Disclosure Agreements (NDAs) and trade secret provisions, both of which China is not all that bad in enforcing....at least when they are done correctly. And I am not being naive here because even before the Google thing, I have told clients they should operate under the assumption that someone in their organization will be passing on company information. I am not trying to make light of the very real IP protection issues in China, but I am saying that for most companies, that is not a good enough reason for ignoring China.

The Conference Board Review, which very rightly describes itself as "Ideas and Opinions for the World's Business Leaders" just published an excellent article, entitled, "Is It the Real Thing?" making a very strong case that counterfeiting is an even bigger issue than believed and setting out some best practices for dealing with it. And as a sort of sideline issue to the main one, it published one by me, entitled, "In China, Piracy is no Excuse," [go to the bottom of your screen for my article] in which I argue that China's lack of IP protection is usually not a good excuse for not going into China.

And I do not even believe our two articles are contradictory.

Piracy and the lack of IP protection in China are huge issues. They are a huge issue for some companies, a big issue for some companies, an issue for some companies, and really not much of an issue at all for other companies. Nonetheless, for most (not all) companies they are not a valid reason for ignoring China entirely. Here are some excerpts from my article, explaining why:

I mention all this because companies’ anxieties about blown secrets resembles their fear of Chinese piracy: Everyone is afraid of it, but really only a small percentage of companies need worry much. It exists, of course, but how much impact does it really have on your business? With very few exceptions, my firm’s China clients have either not been hit with piracy or are too focused on making money from their own products to worry about it much. It is not nearly as much of an impediment to profits as believed.

* * * *

Foreign companies seeking to sell their products into China need to understand the role of wealth and price their products accordingly, if they can. If you are selling a product in China and it is always getting copied, you should consider reducing your prices there to better compete, assuming you can do so without angering customers elsewhere.

Companies doing business in China should also consider piracy prevention measures peculiar to their own products. For instance, my firm’s gaming clients, which typically sell their games on CDs here in the United States, overwhelmingly sell their games online in China, using all sorts of anti-piracy measures to do so. Can these security measures be hacked? I am sure they can. Are these companies making good money nonetheless? They are.

U.S. product manufacturers are sometimes so obsessed with piracy in China that they ignore what I see as an even greater threat: their own manufacturers. My experience convinces me that the most likely candidate to abuse your product is the company you are paying to manufacture it. This company is best positioned to send out “extras” of your product into China on its own, and this happens more often than you might imagine. The best way to prevent these “second shift” products from being produced and sold is to make sure your contract with your Chinese manufacturer expressly forbids this and then monitor, monitor, monitor.

What do you think?

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For the last few months, we have been sounding the theme that China is becoming less beholden to foreign enterprises. We have been saying that the direct corollary of that is China's stepping up enforcement of its laws against foreign enterprises. At the beginning of this year, CLB's own Steve Dickinson wrote an article on this for China Economic Review, entitled, "New Image, New Errors" and earlier this week, we ran a revised version of that article in a post, entitled, "With China's New Standing Come New Errors." In particular, we have been seeing (and writing about) China stepping up enforcement of its visa, tax, and customs laws.

Not surprisingly, we are not the only people seeing this change. Compliance Week Magazine (h/t to China Tax Insight) just came out with an article entitled, "China Whets Its Enforcement Appetite," in which it discusses how China has recently become very serious about enforcing its laws as against foreign companies:

For most of the last decade, China seemed to take a light approach on regulatory enforcement; it worried that strict application of its many laws, rules, and regulations would scare off investors when the economy could not afford to lose foreign money and manufacturing. Now signs are emerging that the days of benign neglect are ending. The government is cracking down on violators of existing regulations, issuing new guidelines and circulars to enhance what’s already on the books, and passing new, tougher legislation.

“Local laws are being stepped up,” says Scott Lane, CEO of the Red Flag Group, a governance, risk, and compliance advisory firm based in Hong Kong. “They are increasing in number and are being enforced.”

The article goes on to note that this new enforcement attitude is here to stay:

China periodically improves enforcement, only to back off when the pain of its efforts becomes apparent; multinational corporations usually just wait out the storm. This time around, all indications are that Beijing isn’t going to retreat in a few months. The latest surge is aggressive and thorough; it also suggests that the new attitude is here to stay.

It goes on to note a "tremendous" increase in enforcement of its tax and customs laws and how penalties for non-compliance are getting quite series as well.

Taxation has seen the most obvious changes:

The compliance push began at the start of 2009, when the SAT published guidance that called for individuals and companies operating outside China, but selling services into the country, to start paying China’s business tax. The SAT then followed up with several circulars requiring foreign companies undertaking engineering and service projects in China to register with the agency, even though the companies in question have no permanent presence in China.

Then local tax bureaus sought to charge corporate income and business taxes on parent companies seconding employees to China. Finally, in December, the SAT extended its jurisdiction—in a move called an “amazing leap” by one law firm—to transfer assets overseas. The SAT is showing no inclination to stop at water’s edge.

The article even mentions specific examples of what we see as the biggest bugaboo, transfer pricing issues:

According to one tax accountant, a foreign company in Fujian province was fined $39 million last year in a settlement over transfer-pricing rules. And according to an internal document of the tax authorities in Shandong province, later obtained by KPMG, the Hong Kong subsidiary of a Belgian company was charged $66 million last year in withholding tax. The subsidiary sold shares in Tsing Tao Brewery to another foreign business, and the SAT decided that the transaction between non-residents outside of China was within its jurisdiction. It further concluded that the tax treaty with Hong Kong did not apply and would not protect the two parties.

And if you are a foreign company in China, do NOT for a minute think that because your domestic competitors are getting away with not complying you can too:

The government does indeed seem to be giving the local companies a pass. While bureaucrats are raiding foreign-run factories, imposing sizable punishments on multinationals, and making demands on transactions that have little to do with China, enforcement of other domestic regulations come up almost comically short.

So what do you do if you are a foreign company operating in China? The first and most obvious thing is to make every effort to follow the laws in the first place, particularly as they apply to company registration, taxation (especially transfer pricing), labor and customs. The second thing to do in many of these instances is to consult with the appropriate governmental authorities when you are unsure. Securing approval from one government official to handle something in a particular way does not guarantee your action will pass muster with some other governmental body, or even some other governmental official within that same body, but it does improve your chances.

Compliance in China. It's the real thing now.

UPDATE: Malcolm Moore and Peter Foster (two top China journalists) just did a Telegraph article, entitled, "UK businesses threaten to pull out of China over protectionism," talking about many of the same things.

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Every few months, my law firm gets contacted by a Western company that wants us to pursue a bad faith trademark case against a company in China. Typically, the Western company wants to pursue litigation against a Chinese company for having trademarked what the Western company perceives to be their tradename or trademark. These cases usually range from very difficult to just plain impossible.

Here are some examples as to why.

Someone Registers "Your" Well-Known Mark in China.
China considers a trademark to constitute a well-known mark if it is well known in China. Coca Cola and maybe now Starbucks would qualify under this standard. AT&T might not. Your trademark almost certainly does not. If you really have a well-known mark and someone in China registers it, you have a bad faith filing. I cannot even imagine what company would think it better to sit back and wait for someone to register "its" trademark in China and then sue that registrant for bad faith filing, as opposed to simply going ahead and registering that trademark in China.

Your Agent Registers "Your" Trademark in China.
China's trademark law states that when "any agent or representative registers, in its own name, the trademark of a person or entity for whom it acts as agent or representative, without an authorization therefrom, and the latter raises an opposition, the trademark shall be rescinded and prohibited from use.”

China's Trademark Office states that "agent or representative" should be very broadly construed and that the authorization must be unambiguous and in writing. This all sounds good and the problem here is not the law itself. The problem is proving that the person who registered "your" trademark in China was your agent.

The most likely person to register "your" trademark in China is someone on the inside. The person best positioned to know the value of your trademark is going to be someone at your China OEM manufacturer, someone at your joint venture partner, or one of your own employees. Under the law, none of these people should be allowed to register your trademark on their own behalf and it is very likely none of them did. This law has now been around long enough so that if your OEM manufacturer, joint venture partner or employee has any brains at all, they will not register your mark in their own name; they will instead have their cousin in Xi'an or in register it, leaving you with the near impossible task of showing the linkage. It will always be cheaper, easier and more certain to register your trademark than to bank on being able to prove that the person who now legally owns "your" trademark in China secured it illegally.

Someone Preemptively Registers "Your" Trademark in China in Bad Faith.
China's Trademark Law also provides that a trademark application shall not be allowed if it is being done to "preemptively register by unfair means a trademark that has already been used by another person where such mark has achieved some degree of influence.” China's Trademark Office states this provision applies to trademarks that have not yet been registered in China and it defines “some degree of influence” to mean that the mark has been used on a product in China and Chinese consumers have come to identify that mark with a particular product in China. This means this provision will probably never apply to foreign marks used outside China. China's Trademark Office defines “unfair means” as having a motive for filing that violates the principle of good faith and fair dealing, as defined in China's civil code.

Factors for determining bad faith in this situation are:

a. Whether the parties had prior business dealings with each other.

b. Whether the parties have had past disputes.

c. Whether the registration was for an unfair motive, such as to force the other party to enter into a business relationship, to force the other party to assign over its mark or to force the other party to pay for having allegedly infringed on the mark.

Again, the law sounds good, but the proof problems are certain to be substantial. And again, it will always be cheaper, faster and more certain just to register your mark in China.

In every single instance when someone has sought to retain my law firm to pursue a bad faith trademark claim in China, we have counseled them against it as the costs are too high as compared to the likelihood of success. And in every single instance when someone has sought to retain my law firm to pursue a bad faith trademark claim in China, about all I can think about while I am telling them of how difficult their case will be is "why the heck didn't they just register their trademark in the first place?"

As we have said many times, the only real solution to protecting your mark in China is to register it in China early and to, at minimum, register every mark that you will be using in China, in both any foreign language and Chinese language you will use. If you wait to file, you are simply inviting a competing registration that will cause you major problems in China. China is a first to file jurisdiction and most be approached that way. If you wait to file until after your brand is already established in China, you are just inviting trouble. There is a good chance someone else will have registered your mark and it is almost certain you will not be able to do anything about it.

Do you feel lucky? Do you?

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Termination of employees in China definitely ranks among the things relatively smart American companies seem to get wildly wrong in China. And I intentionally said "American" here, not "Western," because I think this problem is mostly an American one.

I have previously written on the cultural disconnect between China and the US when it comes to terminating employees:

Last week, I attended co-blogger Steve Dickinson's lecture on China labor law. Steve's lecture was part of a truly superb Doing Business in China seminar put on by Global Nav. The thrust of Steve's speech was that labor laws in China have changed, they are being enforced against foreigners, and they are very different from U.S. labor laws. In a nutshell, the biggest differences are that written contracts with all employees are required in China and firing an employee generally must be for cause. Neither of these are true in the United States.

Judging from the audience questions (and this was an extremely sophisticated audience), many were surprised by this and many had trouble understanding the full import. A few days later, Steve and I were talking about this with the Chinese lawyers we work with in Qingdao. In explaining to them some of the cases we have handled for American clients who got themselves into trouble by improperly laying off Chinese employees, it soon became apparent to Steve and me that the Chinese lawyers were not grasping why these American companies were making these mistakes. They would ask questions like, "how could these American companies really believe they could lay off 100 people without first securing their approval and that of the government as well?" When Steve and I told them about US labor laws, the Chinese lawyers found them so bizarre, they actually laughed.

We told them of how there is a saying in the US that one can fire an employee for good reason, bad reason, or no reason at all, just so long as the reason for firing is not one prohibited by law (such as racial or gender discrimination). We talked about how one might fire an employee for wearing a green shirt. We told them of how most employees in the United States do not work under written contracts and how companies generally prefer not to use them. It took us at least a half an hour for us to give a basic explanation of employer-employee relations in the US and even then, it was pretty clear that these exceedingly bright lawyers were still nonplussed.

It was a good exercise for Steve and me and only reinforced why it is that Americans (the labor laws in Europe are not so wildly different in China) in China so often act on Chinese employment law matters based on completely false assumptions as to how things are really done there.

Americans: Just remember, no matter how capitalist China seems, it still, on at least some level, aspires to be a workers paradise.

China's Labor Contract Law distinguishes between full and part time employees and this post is going to deal only with full time employee. This post is also going to focus only on the situation where the employer wants to end its relationship with its employee(s) and the employee(s) do not desire likewise, aka, unilateral termination.

Employers in China may terminate their employees without advance notice and without severance pay in very limited circumstances, such as when an employee has severely violated company rules, engaged in such a serious dereliction of duty or been so corrupt as to substantially damage the employer, established an employment relationship with another company, or become subject to a criminal investigation.

Because no law defines what constitutes either a severe violation or severe damage, it is essential for the company's employee manual to spell this out. Termination for these reasons does not require payment of severance whereas pretty much every other termination does.

With at least thirty days notice (or by paying one month's salary), an employer (at least in theory), may terminate employees for the following:

-- An employee's inability to perform his or her job after returning after the statutory medical treatment period for illness or a non-work related injury.

-- Clear incompetence that has not been remedied by additional training or reassignment to a new position. Do not even think about this exception unless you have built up an incredibly good written record stretching back quite some time.

--There has been a "material change" in "objective circumstances" such that the employment contracted for can no longer be performed. I am not aware of "material change" or "objective circumstances" having been defined anywhere, nor am I aware of any company having won on these grounds. I am guessing that along the lines of a tsunami shutting down the factory will be required to win on this provision.

Terminating twenty or more employees or more than ten percent of the total workforce has its own, additional requirements.

The point of this post is not to set out in detail the rules for firings in China; it is to point out that there are many rules in China related to firings and that those rules are complicated and/or vague. Firings in China should not be done without real planning and legal analysis.

US rules do not apply.

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Damn.

I just knew it.

I knew there would be no way I (or any lawyer on any subject) would be willing to stay confined to just five.

Let me explain.

As 2009 was drawing to its close, I wrote a post for Shanghaiist, entitled, "Dan Harris: China’s top 5 business law trends of 2010" I talked about visas, company formation, labor law, monopoly enforcement, and taxes. I did not say a word about intellectual property enforcement getting better in China, and mostly that was because such enforcement has been steadily getting better for years.

Way back in 2006, we said that "the more the Chinese courts and officials come to realize IP enforcement is in China's long term business interests, the greater the enforcement."

Over the last few months, there has been an increasing drumbeat of comments from Chinese government officials on the need for innovation within China and for the need for protection of innovation. That drumbeat became a shout (I know I am mixing metaphors) last month when President Hu Jintao stressed the value of intellectual property rights for Chinese companies:

Nowadays, the competition in information technology is extremely fierce. I hope you, as a software company, will treasure technological innovation as your life. You need to own intellectual property rights for your products. I hope you will be pioneers in the development of our country's software industry.

The President's comment was then posted on the Ministry of Commerce Intellectual Property website, as part of an article, entitled, "President Hu stresses importance of technological innovation in Zhuhai." (h/t IP Dragon)

On a somewhat related front, I wrote a few weeks ago how my firm had been seeing a huge increase in matters involving American and European companies seeking to license their technology to Chinese companies. The Chinese government is very explicitly telling Chinese companies to step up their technology and to improve their quality and to secure foreign technologies wherever necessary. This has led Chinese companies to technology licensing agreements from Western companies in numbers I have never seen before.

The Chinese government knows that for technology licensing agreements to have premium value to Chinese companies that enter into them, there must be adequate enforcement of intellectual property rights in China. Everything I have seen over the last six months or so tells me that IP enforcement in China is rapidly improving and will continue to do so. You will, no doubt, still be able to buy fake DVDs and software on the street, but I expect enforcement of patent and trademark rights to continue stiffening.

This is the sixth trend and I should have caught it. What are you seeing out there?

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With few exceptions, the business law trends I see for China in 2010 are not all that different from what I would have seen last year or even the year before. The Chinese government’s primary goal is to stay in power (I think this is true of virtually all governments) and that goal usually drives the enactment and enforcement of its laws. The big, overarching trend I see for China in 2010 is its continuing to more strictly enforce its laws, particularly those that apply to business, and even more so those that apply to foreigners.

The Chinese government wants to satisfy its own citizens so as to maintain its own legitimacy and one of the best ways to do that is to show a desire to protect the citizenry against foreigners. China’s current economic strength is leading many in its government to believe China has little to no need for foreign investment and so I see law enforcement against foreigners continuing to increase.

I see the following five key things happening on China’s business law front in 2010:

1. China will step up even further its crackdown on foreigners in China violating its visa/immigration laws. If you lack an employee visa, you may be at risk.

2. China will increase its efforts to root out and shut down illegal and unregistered foreign businesses. I have seen ample evidence of this already happening in the last 3-6 months and I have no doubt this will continue. Providing jobs to Chinese citizens does not let you off the hook.

3. China will increase its tax collection efforts. This has been going on at a rapidly accelerating pace over the last six months or so. If your China operations are not making a healthy profit, do not be surprised if the government imputes healthy profits to it. In particular, the government will look very closely at your transfer pricing and in many cases it will not like what it sees.

4. China now sees itself as a full-fledged economic power and with that perception we can expect it will be stepping up its anti-monopoly monitoring of mergers and acquisitions. I predict China will seek to impose at least some conditions on all mergers and acquisitions that touch on China, if only just to show that it can.

5. The number of cases brought by employees and resolved in their favor will continue rapidly increasing. This will be particularly true with respect to foreign companies as this will be a great way for the government to show its willingness to protect its own.

* This is my December 31, 2009, post on Shanghaiist.

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Shanghaiist just posted my list of "China’s top 5 business law trends of 2010," which list included China stepping up its tax collection efforts. Drastically.

Speaking of drastically, I just read a really excellent article by a swarm of O'Melveny & Myers lawyers, entitled, "China Adopts Controversial Vodafone-style Extraterritorial Tax and Disclosure Rule," discussing China's just circulated Circular 698. The O'Melveny article summarizes an "amazing" part of that circular as follows:

However, Article 5 of Circular 698 then takes an amazing leap. It [Article 5 of Circular 698] states that foreign entities are required to disclose all indirect transfers of PRC resident enterprises to the PRC tax authorities in cases where an intermediate holding company through which such transfers are made are located in a low tax jurisdiction or such jurisdiction exempts income tax on foreign-sourced income. In this case, the foreign enterprise making the indirect transfer must disclose the following documentation to the PRC tax authority in the location of the PRC resident enterprise within 30 days of executing the transfer contract:

i. Equity transfer agreement/contract;

ii. Representations regarding the relationship between the foreign entity and holding company being transferred in terms of “capital, operation, sales and purchase etc.”;

iii. Representation regarding the operation, employees, bookkeeping, and assets of the holding company being transferred by the ultimate foreign entity;

iv. Representations regarding the relationship between the holding company being transferred by the ultimate foreign entity and the PRC resident enterprise, in terms of “capital, operation, sales and purchases;”

v. Representations regarding the reasonable business purpose with respect to the transfer of the holding company; and

vi. Other materials requested by the tax authority.

The article then very nicely lays out some truly extreme examples of where foreign companies may be required to report to China on their foreign M&A activity and then asks the following series of questions relating to whether the circular is "even legal:"

(1) Is there a legal basis under any validly promulgated PRC law or administrative regulation which imposes information reporting obligations and tax with respect to such indirect transferors? How does an interpretive circular like 698 derive its PRC legal authority?

(2) Does the PRC general anti-abuse rule (“GAAR”) in the EIT grant virtually unlimited power to the PRC tax authorities concerning transactions, including matters of extraterritorial jurisdiction? How does one sentence in a quasi-civil law statute encapsulate an entire doctrine?

(3) Is there a colorable theory under international legal principles to assert extraterritorial jurisdiction over the numerous parties potentially described in Circular 698?

(4) Will the enormous administrative complexities and burdens created by the disclosure mean erratic compliance and result in grossly unfair application of the rule? Can most foreign entities comply?

(5) Will local PRC tax bureaus be staffed with the resources, training, and other administrative infrastructure to deal with those disclosure actually submitted?

This circular is so far out of the norm and so likely to cause an uproar I suspect much of it will never come to pass. No matter what though, it is a great indicator of China's strong desire to increase its taxing powers, especially with respect to foreign companies.

For more on Circular 698, check out the following:

-- Detailed Analysis of of Circular 698, on the China Tax Insights Blog.

-- "China Reinforces Tax Administration of Share Transfers by Non-resident Enterprises," by the Mayer Brown law firm.

-- Tax Alerts by PriceWaterhouse and Deloitte.

UPDATE: China Tax Insight just did a new post on Circular 698, entitled, "One Last Post on Circular 698," taking Deloitte to task for saying "Circular 698 creates some legal questions as to whether the Chinese government has the right to tax foreign companies."

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My clients know way more about their businesses than I do. My job as lawyer is to tell them how I perceive the legal risks and rewards of whatever they are doing and then work with them to help them decide how to proceed. I contribute on the legal side, they on the business side.

Every so often, my firm gets a client who has the "perfect" agreement that it has been using forever and they want us to make it work for China. Okay, no problem. Most of the time.

Other times though we face a real battle and that battle really rests on how one defines "perfect." Sometimes our clients consider the perfect contract to be one that just really really protects them. In every single way. Late delivery? Chinese company has to pay a massive amount in liquidated damages? One item out of one hundred not quite up to snuff? Again, the Chinese company has to pay liquidated damages well beyond any possible harm to our client. Payment by our client? Payment by our client? Ten percent now, the rest upon delivery and confirmation of quality. Oh, and the Chinese manufacturer must not make any even similar product for any other company.

All of the above is well and good, but the reality is that the only Chinese companies that sign such agreements are doing so for Wal-Mart or are doing so, knowing full well they will never abide by it. So when confronted by clients who absolutely insist on these "perfect" contracts and refuse to listen to our advise regarding the realities of the Chinese market, we go ahead and write the contract per the clients instructions. We then sit back and wait a few months for them to return to us to write a brand new contract that someone will actually sign. Or sometimes, the client comes back to us and tells us they no longer want to try to do business in China because nobody there is reasonable.

The best contracts are not perfect for any one side; the best contracts are those that provide the most protection possible, while actually working in the real world.

What are you seeing out there?

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Just got this email, which is not too dissimilar from other emails and phone calls I have previously received:

Like I said before, I'm really enjoying your series on China Law Blog on starting a business in China. It's something I might try myself someday.

I'd be really interested in hearing about a foreigner starting a local Chinese company through a Chinese spouse. I know this is fairly common (I know of several people who have done it this way), but I'm curious about the details. I hear the registered capital must be of a certain amount, or else it doesn't make sense for the Chinese company to "hire" the foreigner to run the business. And, of course, there are also visa considerations. Then, I guess there's the ugly possibility of what divorce means to the company... but I think that's pretty clear. (If partnerships become possible in the future, will foreign management hires be able to become full partners in this kind of business?)

I'd really love to see a blog post on this angle. Please keep my request anonymous, though... no need to make my employer nervous! :)

Great questions.

Earlier this year, we wrote on what we call the fake China joint venture, which is really nothing more than someone wanting to set up an illegal business arrangement as a way of avoiding the fees and costs involved in forming a real joint venture or Wholly Foreign Owned Entity (WFOE). In that post, we talked about the following as a typical situation:

Caller: I've got this great website and it is exactly what China wants/needs. And I've been working on developing it with some Chinese tech friends of mine and we want to take it legal so we can start getting VC (venture capital) funding for it. Here's our plan. Now I know that the old/truly legal/expected/usual way to do this is for me to form my own company and then form a joint venture with my Chinese partners, but I also know that will cost a lot of money. So our plan is for the Chinese company to own the website and then we will have an oral agreement (or a written agreement) that I really own half of it.

Me: Listen, my firm has been contacted at least twenty times after these situations have gone bad and I am aware of at least another twenty times where the same thing has happened, and let me tell you, these arrangements (it is NOT proper to call these joint ventures) virtually always end the same way. They end with the Chinese company booting you out completely and leaving you with no recourse. Protecting foreign companies in legitimate joint ventures is difficult enough, but it is pretty much impossible under the scenario you are describing. We had a guy who paid us a lot of money once for us to do everything we could to try to get "his" multi-million dollar business back. Guess what, we could not even come close to getting it back. Every Chinese lawyer we talked to about suing to get it back told us we had no chance of winning at all. I mean, just listen to the argument we would need to make to the judge:

Your honor, my client knew that China's laws are very clear on what foreign companies must do to operate legally in China, but he thought these very clear laws should not apply to him because, well because he is an American tech company and he was just too smart/too poor to bother to comply with the very clear laws. So instead, he had this great method for completely circumventing China's very clear laws. His idea was to not form a company, but rather, have his Chinese friends form the company and he would have a little side deal with that company. Well, that side deal has now gone bad and my client wants you to go against China's very clear public policy on how foreign business is to be done in China and enforce this unwritten side deal.

What do you think of that argument?

Caller: (long pause) I understand things could go wrong with that kind of arrangement, but would you be willing to draft the contract between me and the Chinese company?

Me: No. I can't do that. I can't draft a contract that I know will never work. I just can't. Give me a call if you ever want to do this legally, in a way where you actually have a chance of profiting from your work down the road.

We then referred readers to the following:

For more on this, check out "China SMEs, Own If You Want To Own." To get a feel for how difficult it can be even with a fully legal joint venture, check out this article by Steve Dickinson in China Brief, entitled, "Avoiding Mistakes in Chinese Joint Ventures." and this Wall Street Journal article I wrote, entitled, "Joint Venture Jeopardy."

UPDATE: In, "Private Equity, Venture Capital and ‘Fake’ China Joint Ventures," China Hearsay very nicely maps out the way these deals are typically done (using an offshore holding company) and notes that you might have legal recourse in the rare instances where your Chinese partner has "huge assets offshore" in a country in which you can sue and win:

You can tie up the Chinese founders in 100 different contractual knots, but unless those founders have huge assets offshore (real assets, not equity in the holding company) that you can go after in a dispute, they can always tell you to piss off and kick your ass out of the business.

But back to the email and what can happen to a business started through/with a Chinese spouse?

Here are some thoughts:

1. If the marriage works and the business works, then it is all good.

2. If the marriage works and the business fails, the business fails.

3. Because my firm does not represent Chinese nationals seeking to form Chinese domestic businesses (it would not make any sense for them to retain us for this sort of thing), we are not very knowledgeable about this and so I do not know what sort of minimum capital would be required for such a business to hire a foreigner.

4. If the marriage fails and the business works, what happens? This is the key question and I do not know the answer. The business belongs solely to the Chinese spouse, so the question then becomes a Chinese family law issue. What happens under Chinese divorce laws to something that can legally be owned only by the Chinese spouse?

5. What about China's new laws on the "Establishment of Partnerships within China by Foreign Enterprises and Foreign Individuals," set to go into effect on March 1, 2010? These new measures will allow foreign enterprises and individuals to form partnerships with Chinese enterprises and individuals, but it is very hard to say at this point what impact those new laws will have. But, my hunch is that the fees and costs of setting up one of these partnerships legitimately will be roughly the equivalent of setting up a WFOE or a Joint Venture, so I do not see them solving the problem of the foreigner who wants to set up a China business on a shoestring.

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China's Labor Contract Law (which law applies to every employment relationship in China) is very clear: employers must pay their employees for overtime.

Though there are some exceptions, these exceptions are not nearly as broad or as easy to obtain as is widely believed.

Overtime payments are 150 percent for each overtime hour worked on a normal work day, 200 percent for each overtime hour worked on a day off, and 300 percent for each overtime hour worked on a statutory holiday. China considers forty hours per week as generally considered standard.

Though high level management and other staff can be considered exempt from overtime pay, to be so, prior government approval is typically required. To make matters even more complicated, local regulations definitely can vary on what constitutes an exempt employee and what is required by way of approval.

My firm has handled around a half a dozen cases where foreign companies came to us after having been sued for having failed to pay overtime. In every single instance, our advice and eventual action was to settle the claims because they were all valid. Interestingly, despite all of them having been valid, we were able to settle them for considerably less than full value because the employees were so desirous of getting a lump sum payment and fast.

I thought of these cases today after a reader sent me a China Daily article entitled, "Labor Disputes Skyrocket in Beijing." The article talks about how "about 80,000 [Beijing] workers had been involved in disputes with their employers by the end of November, double the number of last year" and up from 26,000 disputes in 2007. The article then noted how "about 50 percent of the cases were related to overtime rates and payment" and the reader asked me if I had been seeing the same thing elsewhere in China with respect to foreign employers.

My answer was, "Yes." Employees and ex-employees are suing their foreign employers in China way more now than just a few years ago and most of those lawsuits are stemming from a failure to pay overtime, a failure to pay sufficient wages without a written contract, or from a termination not provided for in the employee manual. We are finding these cases very easy to settle at a fairly reasonable cost, but virtually all of these could have been avoided with just basic care. There is no excuse for not paying overtime or not securing an exemption for your employees to whom you believe overtime is not necessary. There is also no excuse for not having a written contract with your employees or a written employment manual setting out the grounds for firing.

Oh, and if you think the person you are paying is an independent contractor and not an employee, there is about a 99.9% chance you are wrong and that person is, in fact, an employee.

What are you seeing out there?

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In June of this year, China enacted a new Food Safety Law. It is stating the obvious to say that China's food safety is of relevance to the entire world and China food safety is the rare case where both foreign and domestic interests are united in wanting to solve a major problem within the Chinese system.

China's new food safety law takes the position that the food safety problem arises from inadequate central control and from a lack of clear standards and procedures. However, even if this were true, the measures adopted in the Law will not resolve these issues.

The Law created a Beijing based coordinating council called the National Food Safety Commission to coordinate five national level ministries that have day-to-day control over different phases of the food production process. Since the Law does not set out the structure or authority of the new Commission there is no reason to expect this approach will improve central control of the food safety problem. It does little more than create another layer of bureaucracy.

The new Law mandates additional rule-making to regulate every phase of the food production process, a complete review and assessment of current food safety issues, national standards for food quality and safety, and a unified national program for addressing food safety emergencies.

But the Law provides absolutely no details about any element of this program. There are no standards, no time-line, no budget, no procedure for obtaining the input of regulated parties and no procedure for resolution of disputes. It is not uncommon in China for laws to be adopted on controversial topics that leave nearly all of the details to later regulation. The usual result in China is that such regulations never appear, rendering the law essentially meaningless. That has so far been the fate of the standards and procedures portion of the Food Safety Law.

However, even if these difficult issues were to be resolved, the Law will not resolve the food safety problem in China.

Food safety cannot be enforced through government supervision and administrative sanction. Food safety standards function only where there is an effective system of private civil litigation that allows injured parties to take action independent of the government. As with most countries, China simply does not have the funding or expertise to hire qualified inspectors and regulators to enforce to the food safety system. China has over 200,000,000 farmers and over 500,000 food production companies. Its food production system is too vast to allow for meaningful inspection at all stages of the food production process.

The government can play an important role in setting the proper standard, but only when Chinese citizens can use China's court system to obtain damages will China's food safety likely markedly improve. China's tort law system is undeveloped and regulators strongly discourage its use in safety and health related matters.

The Food Safety Law is also not directed at the real problem. In a fundamental sense, China did not need a completely new set of standards and procedures. The previous standards would have been perfectly adequate had they only been enforced.

Chinese farmers and herders are poor and uneducated. Most operate at a loss and only survive by supplementing their income through nonagricultural activities. The same is true of most food processors, who sell into a partially price controlled market and who are frequently on the verge of bankruptcy. These people and businesses do not believe they have the luxury of being concerned with standards and rules and procedures. They make decisions based on day-to-day survival. They will, therefore, take many actions in violation of the law if they believe doing so will give them some financial benefit. They do not worry about the long term impacts. They are only concerned with survival today. In this situation, which is prevalent all over China, no amount of regulation and supervision will have any impact. They ignored the old and simple rules and we can expect the new rules will receive equal treatment.

Having said all this, there is one thing that does seem to be working with respect to China's food safety, at least on the high end and at least in the bigger cities. China's consumers are concerned about the safety of their food and they are hyper vigilant on this score. The food companies know this and they have stepped up their quality control monitoring and they are not shy about getting this word out.

What are you seeing out there?

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Just got this comment (comment # 63 on our post, "China: First Let's Clear Out The Long Time Foreigners", which poses some pretty important questions and also leaves hanging some very common misperceptions regarding doing business in China:

So here's my question albeit already bounced around but no solid answer given....

JV or WFOE for a new foreign company launching in China?

I am about to launch my company that I have been planning for 8 years and will do things by the book, no qualms about that, but I don't want to start the thing in a realm of probable employee threats, and local competitor company lordship privileges.

Especially if it's capable of being taken away from me over 5 mao (50 cents) missing in a tax audit because someone has decided that my company will look better in the hands of my local competition.

I have seen many situations of law bending to suit local businesspeople to their advantage, and in those situations the victims of such law bending have almost always had little power to protect themselves.

Would not JV be the better option over WFOE?

At least with a local person in a directors chair it would be harder for sharks to pull the company down.

The whole idea of building a company here in China is fearful and daunting but it's what I want to do.

Re: Operating illegal biz in China;

I care not that the govt. closes them down. It would be exactly the same in my homeland.

Should that happen, they only have themselves to blame.

Lawbreaking is lawbreaking in any language.

Yet I do agree, Chinese law is ambiguous by nature and isn't self explanatory where it should be.

I swear, I was asked nearly the exact same question not all that long ago when I was lecturing on the legal basics of foreign investment into China. And just as I did then, I am going to break down this series of questions and statements and answer it. Here goes.

1. "JV or WFOE for a new foreign company launching in China?" Sorry. Impossible to answer. There are just too many variables that go into this determination and you have really only discussed one, and it is one I do not even see as being terribly relevant. In making this decision, the first question that must be asked is whether the business you are planning is legal as either a WFOE (Wholly Foreign Owned Entity) or a JV (Joint Venture). Most types of businesses these days can be operated by foreign businesses in China as either a WFOE or a JV, but there are still some businesses that are completely off limits to foreigners and there are still some businesses that must be operated as a joint venture and not as a WFOE. There is also sometimes the possibility of operating your business as a Representative Office, but those are fairly rare and the scope of those businesses will always be very limited. I also should note that China will soon also be allowing foreign companies to enter China as part of a partnership.

Assuming you can enter China as either a WFOE or a JV, the hard analysis must now begin. Speaking very generally, WFOEs give you greater control than a Joint Venture. Joint Ventures give you the advantage of having a local partner to help you negotiate new territory and also someone with whom you can share the work and the expenses.

2. "At least with a local person in a directors chair it would be harder for sharks to pull the company down." You can put a local person in your WFOE directors chair if you wish. You seem to believe that a WFOE is more likely to be pulled down by sharks than a Joint Venture, but my experience is that the shark most likely to pull down your business is the one you have invited into your swimming pool. All I can tell you is that my firm has never worked on a matter involving a WFOE that got "pulled down" when it was operating legally. I am not saying this cannot happen, but I have never heard of anything like the example you give of a WFOE being shut down for failing to pay 5 mao in taxes. My firm has handled a number of instances for WFOEs that have gotten in trouble with the Chinese government for things like pollution, zoning issues, tax issues, employment issues, etc., and there have definitely been times where our clients have had to pay fines and there were times we did not think those fines were particularly fair. But I am not aware of any client of my firm or any legitimately WFOE anywhere in China being shut down for a minor infraction. I am aware of China changes its rules and making what was once legal for foreigners no longer legal for foreigners with terrible business ramifications, but that is a different issue.

On the flip side, I estimate maybe around ten percent (or maybe even more) of my firm's revenues from its China practice each year comes from our representing foreign companies in a joint venture gone bad. We are typically working on anywhere from one to three of these failed joint venture deals at any given time and they are seldom pretty. If you are a foreign company and you have entered into a joint venture in a third tier Chinese city and your joint venture agreement was badly written in terms of protecting you, you will be lucky to get past the shark in your tank without losing at least half your fingers and toes.

My experience (and I think virtually every China lawyer will agree with me on this) is that you are at much greater risk of being eaten in a joint venture than if you do a WFOE.

3. "Yet I do agree, Chinese law is ambiguous by nature and isn't self explanatory where it should be." This is just not true when it comes to China business law. I have said this countless times and I will say it again. Much of the belief that China's business laws are ambiguous stems not from the laws themselves, but from their varying (and almost universally poor) translations and from people who claim they know what the laws say without ever having read them. China's business laws with respect to foreign investment are, for the most part, very well written and very clear. A couple years ago, we did a post entitled, "China Company Formation Law Is Clear -- WFOEs Are Easy," where we argued that the laws on how to form a WFOE in China have stayed the same for quite some time and really are very clear.

My best advice to you is that you figure out what will be best for your situation, taking into account China's laws and its realities on the ground.

On a pretty much unrelated note, the race for best blog in the ABA Journal competition is really heating up and China Law Blog is hanging on right now with a razor thin lead. That being the case, I strongly urge all of our readers to click here and register on the site and then click here and vote for China Law Blog in the "geo" category. Your vote really does count and it will be much appreciated. Thanks.

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That's Hot.

If two years ago, someone had asked me to describe my law firm's typical China manufacturing client, I would talked about a company that was either doing contracting out its manufacturing to China or doing its manufacturing in China itself, all of this strictly for export from China.

It just struck me today that our typical China manufacturing client has changed. It is now an American company that is manufacturing in China to sell its products in China. And they are all going about this in very different ways. The following are good (and very recent) examples (with a bit of merging of companies and fudging of facts so there will be no identifiers) of what we are seeing out there:

1. US company that had been making about 50% of its products in China for shipment back to the US for sale primarily to one very large American company. It now has a WFOE (wholly foreign owned entity) in China where it makes about 90% of its product for sale to that same very large American company, which now takes delivery of the product in China.

2. US company that was making its product in the US and was using a Chinese company in China to assemble it in China and sell it there. US company and Chinese company had been working together for years and when it came time for the owner of the Chinese company to retire, the US company purchased it and stepped up its manufacturing in China.

3. Chinese company is told by its two largest Chinese buyers that it must bring its product standards up to Western standards or the two Chinese buyers will switch to Western suppliers. Chinese company contacts my client who, in turn, licenses the right to the Chinese company to manufacture the US product. My client very closely monitors for quality and even has the right to reject product for sale. The interesting thing here is that all parties related to this product want it to be that way.

The two Chinese buyers who had demanded US quality product appreciate that nothing will get shipped to them unless my client deems it worthy of its name. The Chinese manufacturer/licensee likes this arrangement because without it, it would not have this business any more. My client likes it because it is making money on China sales that it otherwise would never have made and it is able to do so without having to build its own manufacturing facility and without compromising the quality of its products and its name.

Western companies licensing the manufacturing of their products to Chinese companies is the next big thing. What I find interesting is that the American companies usually start out very wary about these licensing arrangements. They oftentimes want to set something up where the Chinese company manufactures the product for the American company and then the American company buys the product from the Chinese company and then re-sells it on the Chinese market. They want this arrangement because they believe it gives them more control. This sort of arrangement is possible, but it seldom makes sense because it requires additional taxable transactions and it requires the US company to form a Wholly Foreign Owned Entity (WFOE) and it requires the US company to figure out how to market and sell its product in China. In the end, licensing is going to be easier and, if handled properly, can provide virtually the same safeguards.

Our clients are concerned about the Chinese manufacturer selling its US branded product out the side door or using the knowledge it has gained of the US company's product technology and manufacturing processes to start making its own competitive product. These concerns are completely valid but they can be addressed virtually the same way in the licensing agreement
as they would be under an arrangement where the Chinese company sells the product to our client for eventual resale.

We have a client that makes a component part that is so critical for the final product that we have been able to draft licensing agreements for the final product that are not much more detailed than "licensee shall pay $10 for each final product it manufactures and the amount of final product for which licensee shall be required to pay this $10 shall be determined by (and equal to) the number of critical component parts it purchases from the American company." On the flip side, we represented an Asian manufacturer in a licensing deal with one of America's largest and best known consumer product companies that involved a 160 page licensing agreement (not counting the hundreds of pages of technical attachments) that essentially made clear that the American company would monitor, control and determine pretty much everything our client did in relation to the American product, including the content of its advertising and to whom the product could be sold.

In addition to the licensing agreement, the US or other foreign manufacturer must not forget to register its intellectual property (IP), such as trademarks, copyrights and patents, in China under its own name. The licensing agreement can protect the foreign company's intellectual property (IP) from its Chinese manufacturers, but it will not do anything to protect the foreign company from third party's in China using its IP. For that, registration is required.

What are you seeing out there?

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I dunno.

We recently did a couple of posts on what is required to form a Wholly Foreign Owned Entity (WFOE) in China. In the first of these posts, "How To Start A Business In China -- WFOE," we we set out the four main steps in forming a WFOE. In our second post, "How To Start A Business In China -- The Minimum Capital Requirements For A WFOE," we discussed the minimum capital requirements for such entities. I tagged both of these posts with our newly created "Basics of China Business Law" category.

Micah Schwalb, an attorney and blogger at Boulder2Beijing then wrote me with the following:

One item it might be interesting for you to touch upon is when you DON’T need to do any sort of formation, as in the case of a foreign business contracting with a Chinese business for certain services, or when companies pay (foreign) employees on the basis of service contracts. I’m not saying that these are particularly, well, legal, but it might make for an interesting post, as it happens quite often.

Unfortunately, Micah is right. I say unfortunately, because there is no right or wrong answer on when it is necessary to form a company, which means writing a blog post on it is not an easy task and which means this post will NOT be going into the "Basics of China Business Law" category.

It is necessary to form a business in China is that it is legally necessary if you will be doing business in China on anything other than a temporary basis. But what exactly does that mean?

This post is not intended to give a definitive answer as to when it is necessary to form a Chinese company. Rather, it is meant to raise some of the issues and expose some of the analysis that goes on about those issues.

We face this issue all the time with companies that want to hire independent contractors in China. There is no legal way to do this under Chinese law, yet it goes on all the time. Some companies that do this run very little risk, while some run huge risks. What fascinates me about the companies with which I discuss this is how many of them have not even considered the risks, which include the following:

1. The independent contractors take physical or IP assets and the foreign company cannot sue because it is not even supposed to be in the country at all. We had a software company contact us about its independent contractors in China who had taken their software codes and were now selling their product both inside and outside China. Not a good situation.

2. The independent contractors sue the foreign company on an employment claim. These happen all the time and the foreign company essentially has two options. One, pay the entire claim in an effort to minimize (but not eliminate the risk of being thrown out of China) or just simply pack up (really quickly) and leave.

3. Getting shut down.

The other thing I find people fail to consider is their ability to secure investors or to sell the company later. We have a very savvy client who has started and sold dozens of companies around the world and one of the things he is always telling us is that his expertise in forming companies is one of the things he makes money from on the sale. He has formed and sold around a half dozen China WFOES (he sells them from one American company to another) and he says much of what he makes is relieving the buying company from having to take the time and money to form its own company.

My firm will not write investment contracts for companies that do not exist. Those are never worth it.

Let me give you some real life examples and the advice we gave and why.

1. US services company that sends five highly skilled people to a remote region in China once or twice a year for one or two months at a time to provide services to US companies with WFOEs in China. Because it would not be that big a deal if these people were blocked from entering China or forced to leave on short notice, we jointly determined that the risks involved with not forming a WFOE were not all that high and the client has chose not to do so.

2. US company that had five people whom it called "employees" doing R&D work for it in China. This sort of arrangements are disasters waiting to happen as these are the exact sort of arrangement the Chinese government is stepping up its efforts to shut down. See our post "China: First Let's Clear Out The Long Time Foreigners," for more on that. See also "Fake China Joint Ventures. Why You Calling Me, I'm Not The Guy!" In that post, I laid out what has become an all too typical phone call:

Caller: I've got this great website and it is exactly what China wants/needs. And I've been working on developing it with some Chinese tech friends of mine and we want to take it legal so we can start getting VC (venture capital) funding for it. Here's our plan. Now I know that the old/truly legal/expected/usual way to do this is for me to form my own company and then form a joint venture with my Chinese partners, but I also know that will cost a lot of money. So our plan is for the Chinese company to own the website and then we will have an oral agreement (or a written agreement) that I really own half of it.

Me: Listen, my firm has been contacted at least twenty times after these situations have gone bad and I am aware of at least another twenty times where the same thing has happened, and let me tell you, these arrangements (it is NOT proper to call these joint ventures) virtually always end the same way. They end with the Chinese company booting you out completely and leaving you with no recourse. Protecting foreign companies in legitimate joint ventures is difficult enough, but it is pretty much impossible under the scenario you are describing. We had a guy who paid us a lot of money once for us to do everything we could to try to get "his" multi-million dollar business back. Guess what, we could not even come close to getting it back. Every Chinese lawyer we talked to about suing to get it back told us we had no chance of winning at all. I mean, just listen to the argument we would need to make to the judge:

Your honor, my client knew that China's laws are very clear on what foreign companies must do to operate legally in China, but he thought these very clear laws should not apply to him because, well because he is an American tech company and he was just too smart/too poor to bother to comply with the very clear laws. So instead, he had this great method for completely circumventing China's very clear laws. His idea was to not form a company, but rather, have his Chinese friends form the company and he would have a little side deal with that company. Well, that side deal has now gone bad and my client wants you to go against China's very clear public policy on how foreign business is to be done in China and enforce this unwritten side deal.

What do you think of that argument? Oh, and I should also tell you that since these contracts you have will almost certainly be found to violate Chinese law, the judge will almost certainly find them void them ab initio, which means they will be deemed to have never existed.

Caller: (long pause) I understand things could go wrong with that kind of arrangement, but would you be willing to draft the contract between me and the Chinese company?

Me: No. I can't do that. I can't draft a contract that I know will never work. I just can't. Give me a call if you ever want to do this legally, in a way where you actually have a chance of profiting from your work down the road.

To be crystal clear here, these arrangements are not legal and they do not work.Yes, they might work for a year or so, or even a few years, but our experience and the experience of every single person I know who really knows China is that eventually these arrangements will fall apart and when they do, it will be you as the foreigner who will pay the price. And the interesting thing about these arrangements is that they not so coincidentally fall apart right when the great foundation has been laid and they are really starting to bring in money. No surprise there.

There are really only two ways to handle the situation where you want to have people in China working for your company. One, you form a Chinese entity, either a WFOE a Joint Venture (JV), or a Representative Office (RO) and you hire them as employees (of your company or of a staffing company if you are going in as a Rep Office). Or two, you enter into a business to business (B2B) contract with a Chinese company that itself employs the people in China you would like to see working for your company. It really comes down to a question of costs and control. It will almost certainly cost you more up front (though you may actually save money in the long term) to form your own company and hire your own employees, but you will have more control over them that way. So form your own company and hire people or contract with a legitimate Chinese company with its own employee, but just don't "hire them" yourself without a company in place.

But there are always exceptions. We are "aware" of a company that is operating illegally in China because there is absolutely no way for it to operate legally because its type of business cannot be owned by foreigners. This company knows exactly what it is doing and it has considered the risks and rewards and chosen to go forward. It assumes it will eventually get shut down and it operates accordingly in that it seeks to make as much money in the short term as possible, while spending as little as possible. Its goal is to hang on in China until its type of business becomes legal, and then it plans to do so itself. It has been there for nearly two years now.

3. US service company that every once in a while gets highly lucrative contracts from one particular US company that has it send about twenty people to China for three to six months. It would be a complete disaster (maybe to the point of losing this one giant client) if more than a couple of these employees were not allowed into China right away or if any of them were to be kicked out. So even though the risk of having a problem were actually fairly low, the cost to the company if that were to happen were high enough that we decided it should form a Chinese company and secure employment visas (Z visas) for a sufficient number of key employees. It did that and it has operated without a hitch ever since.

4. US manufacturing company with two salespeople in China. These two salespeople had been with the company for around five years and their relationship with the company had been uniformly excellent. These two wanted to become legal employees themselves and they asked our client to form a China WFOE so that would be possible. Our client was rightfully reluctant to do so because of the formation costs. We talked with them about how they could form a Rep Office and "re-hire" these two people through a Chinese agency. But the whole issue of using commission salespeople in China is a mess and since salespeople are subject to the same employment contract rules as everyone else. So most foreign companies would prefer to treat these Chinese salesmen as 'independent contractors", raising all the issues discussed above. There is no great solution here.

The same is true for the foreign company that wants to hire one or two people to repair their sold product in China. The foreign company has essentially only two legal choices. Form a WFOE and hire these people as employees, or convince them to form their own Chinese domestic company and enter into a contract with that company.

What do you think?

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Though most of my law firm's practice involves helping American and European companies go overseas, at least ten percent of our business involves helping foreign companies enter the United States. This number always fluctuates, depending on how things are going economically in the United States versus the rest of the world and on how the US dollar is doing on currency markets.

During the dot.com boom, I was getting a ton of work from Korean and Japanese and Russian and other companies seeking US venture capital funding or just seeking to make their mark on the US market. During the height of the US real estate boom, we were handling a fair number of matters for Russian and Korean and a few Chinese clients seeking to own a piece of the American real estate pie. We are starting to see a few inklings of incoming work by foreign (mostly European) investors looking at the United States companies again, now that prices have fallen so much.

And then we have always and somewhat consistently had the bizarre practice of setting up US companies for companies from mostly less developed countries (Vietnam is the prime example) who want a US company so that they can go back to their home country as a US company. This tactic is known as a "round-tripper." Let me explain.

Just by way of a hypothetical example, you have a large Vietnamese or Russian company and you are getting squeezed by the authorities for whatever and for whatever reason. Maybe the government knows you are doing well and wants a piece of your action. Or maybe you are tired of the local bureaucrats always hitting your company up for a bit o' the baksheesh and you believe that this sort of thing will be less likely to happen to a foreign company (see the Sopranos episode involving how the mob was unable to collect from a new "Starbucks-like" cafe in the neighborhood" for one explanation of why this might be the case). So you form a US company and you take that company and return (hence the name round-tripping) to your native country with it. These round-tripper companies were very common for China back in the day when China's tax structure greatly favored foreign companies as an incentive to get them to invest in China.

Or let's suppose you are a large Ukrainian construction company and you are bidding on a large airport project in Poland. Let's face it, being an American company is going to give you more credibility and trust than being a Ukrainian one. The reasons for wanting a US company are endless, especially since US tax laws are (or should I be saying were) not that oppressive as compared to many other countries.

The other day, my firm got its first China WFOE (Wholly Foreign Owned Entity) that wants to form a US company. Now when you think about that, it is not so strange and, if anything, it is maybe a bit strange that we had not gotten such a matter until now. But I do think this is really noteworthy. What we have here is a Chinese company owned by a European company in a country with very high taxes and this company now wants to go into the United States to sell the product it has been manufacturing in China and selling in Europe. And rather than come into the United States with a company owned by their European company, they want their US company to be owned by their China WFOE. We have just begun looking into the legal aspects of this deal from all perspectives.

But I thought of this new client this morning when I started reading more on how the China Joint Venture (JV) between General Motors (GM) and Shanghai Automotive Industry Corporation (SAIC) will be moving into India.

This all makes sense. Foreign companies, be they in China independently as WFOEs or be they there as part of a joint venture, are going to be looking to expand worldwide as their China operations become stable.

I think we are looking at a trend.

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I am in a terrific China Law ListServ (yes those things do still exist), graciously run by Professor Donald Clarke of the Chinese Law Prof Blog. There are some seriously smart and knowledgeable people on the ListServe and much of the discussion is more geared toward China law academics than practitioners. I typically skim every email, but really read only around 25 percent.

Over the last few days, there have been a number of emails regarding Julie Harms, an American and a Harvard graduate, who has been petitioning Beijing regarding trespassing charges her (Chinese?) boyfriend is facing. I skimmed the first email or two on this and quickly determined Ms. Harms' situation was of no relevance to my law firm, to our clients, or to this blog.

I was wrong.

Petitioning is a "system" in China where citizens (people?) dissatisfied with their local government officials or legal matters (or really, whatever) seek to voice their grievances with "Beijing." According to Carl Minzer describes it as follows:

"[P]etitioning’ [is] a traditional means of seeking justice firmly rooted in Chinese history. Defined broadly as an effort to “go past basic-level institutions to reach higher-level bodies, express problems and request their resolution,” petitioning includes a variety of practices that parallel, overlap, and in some cases replace formal legal channels. These practices have survived into the post-1949 People’s Republic of China in the form of citizen petitioning of numerous “letters and visits” (xinfang) bureaus distributed throughout all Chinese government organs, including the courts.

Development of a modern legal system over the past two decades has not eliminated these petitioning practices and institutions. Formal Chinese legal institutions have developed internal means of accommodating petitioning behavior. Since the 1990s, Chinese authorities have also passed a web of regulations to govern both petitioners’ practices and the operation of national, provincial, and local xinfang bureaus.

Today, I read a really interesting post on the Law & Border Blog, entitled, "Would a Foreigner Complain about Chinese Visa Problems Through the “Petitioning” System?" The Law & Border blog is written by a US lawyer, Gary Chodorow, whose practice focuses "focuses on representing companies and investors in U.S. visa matters." So, Chodorow naturally focuses on whether foreigners might start using China's petitioning system to seek resolution to their China visa issues and his post concludes by seeking "reader comments about whether it may be useful for a foreigner to make complaints about China visa issues through the petitioning system."

Which got me to thinking. Might foreigners also use the petitioning system to complain about other Chinese legal matters as well? What about an employer who unfairly loses a lawsuit to an employee? What about the owner of a Wholly Foreign Owned Entity (WFOE) who is not allowed to leave China because a Chinese citizen is falsely claiming the WFOE owes him or her money? The possibilities are endless.

I know almost nothing about the petitioning system but I think I know enough to know that it is not likely to be a viable option for foreign businesses. Right? What do you think? Ms. Harms' actions certainly do at least raise some new issues.

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U.S. Supplemental Admiralty Rule B is an amazing rule. Absolutely amazing, and, in many ways, quite unlike anything else in the US judicial system, and so arcane as to not really fit in it so well any more. Under this rule, if a plaintiff has a maritime claim against another party and that other party is not within the district in which the lawsuit is commenced, the plaintiff may seize the defendant's assets without having to post a bond. To put it more bluntly, one party can seize millions of dollars of another party's assets without notice and without having to post a bond. To put it mildly, this is an incredibly strong mechanism to collect money from a defendant.

The rule was originally instituted mostly to aid vessel suppliers in recovering from non-paying vessel owning companies without a local presence that would allow them to be sued locally.
But there have always been a fair number of judges who have hated this rule due to its lack of procedural or monetary safeguards and those judges typically will not issue the attachment order unless the plaintiff has dotted every single "i" and crossed every single "t".

In 2002, the U.S. Federal Court of Appeals (this is the court that covers New York) held that plaintiffs could seize electronic fund transfers (EFTs) under Federal Supplemental Admiralty Rule B. This ruling created a cottage industry of which my firm was a more than willing participant. Let me explain.

Any time there is a bank to bank dollar transaction, the funds "ping" a bank in New York (I borrowed the word ping from the computer world because I think it fits what actually happens). So if a company in Hong Kong pays a company in Japan $600,000, that $600,000 will almost certainly go through a New York City intermediary bank, at least for a split second in time. Or if a company in Nebraska sends $950,000 to a company in China, the same thing will happen. Likewise, if a company in Russia pays a company in Seattle.

Now here is why it matters.

Since nearly all dollar denominated international transactions pass through New York intermediary banks, the ruling meant that a massive number of payments could be seized as they electronically pinged these New York banks, without need even for the posting of a bond. Something around one third of all federal court cases in the Southern District of New York (New York City) involved plaintiffs seeking Rule B attachments.

And my firm was always in the thick of things as a number of our clients are in the business of supply fuel or spare parts to vessels and a number of our clients are in the fishing and other maritime related industries. Click here for an interesting article written by a Dalian attorney about a China cargo arrest we did with that firm back in 2003.

And we loved the New York seizures most of all because there is nothing better to seize than real money. In just the last year or so, we had the following sucesses:

-- We successfully seized funds in New York City that were going from Japan to Hong Kong to collect on debt owed to a Singapore client.
-- We successfully seized funds in New York City that were going from a Korean company to a Russian company to collect on a debt owed to our Hong Kong client.
-- We successfully seized funds in New York City that were going from a German company to a Chinese company to collect on debt owed to our U.S. client.

And in all of these cases, we not only collected every penny owed, plus interest, we also managed to recover our clients' attorneys fees. If you are a foreign company and your funds have been seized in the United States and you really do owe the money, it just does not make a lot of sense to hire an expensive New York City lawyer to fight it, especially if your creditor's contract states that the prevailing party gets interest and attorneys' fees.

But these Rule B EFT cases in New York have always been controversial and, even more so than the traditional Rule B cases, there are judges who hate them. In New York (or so we have been told by NYC lawyers) there were judges who would sit on this cases in the hopes it would be too late by the time they ruled.

Banks never much liked the Rule either because they were forced to spend large amounts of time and money dealing with the courts' rule B orders. And probably most importantly, there has been a growing feeling that maybe the United States should not be doing things right now that encourage foreign transactions to be conducted in a currency other than the U.S. dollar.

But on October 16, 2009 (mere days after I and our local NYC counsel had just secured a Rule B order from a New York court against a Russian fishing company that owed my client money) the Federal Court of Appeals, in the case of The Shipping Corporation of India v. Jaldhi Overseas went off and reversed its 2002 decision permitting such transfers. The court held that its 2002 decision was wrong in finding EFTs to be attachable property.

In my case that was pending at the time Jaldhi came down, we are still fighting for the money on various grounds on which the Jaldhi case has no applicability. But the days of easy seizures of money appear to be over and what was in many cases the best avenue for collecting debt from a Chinese company has just disappeared.

We had a case against a Chinese company waiting in the wings, but that is now on indefinite hold.

It was a good seven years.

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Yesterday, I wrote a post on how to succeed in China business, the theme of which was that the real keys to business success in China are related far more to do with doing business the right way than they are to anything peculiar to China. I received a great comment to that post from someone ("Chris") whom I do not know, but someone who obviously knows whereof he speaks. That comment was so good and so helpful, I am going to run much of it now:

As someone who has been involved in the evolution of a business in China over 10 years, from entry strategy to maturity, the 5 key areas outlined are spot on. Commitment from HQ is required, great people who are nurtured and developed need to be recruited locally, the market and sales channels need to be understood (what are you selling where and to whom?), key competencies need to be built ‘in-house’ within your own organisation both in China and overseas (key staff who understand the operating environment, compliance, the market, the challenges etc). Resources need to be committed, modestly at first then scale up as the opportunities mature and the business develops.

All of this applies to business development anywhere really. Too many companies choose the staff they enter the China market quite poorly and through weak HR processes. As pointed out above, ‘Chinese’ or ‘China expert expat’ does not make someone an expert in your business in China.

* * * *

All of this is Business 101 for any market in the world. However it is surprising how many businesses overlook this in favour of a ‘China is different’, ‘relationships are everything’ approach that results in them bringing in people utterly unsuited to running their China operation. In any market, employing the best people who are committed professionals in their own area of expertise is key to setting up a successful and sustainable business.

I responded to the above comment, with my own comment, which was as follows:

Chris,

Hear, hear!

Not sure entirely why, but your comment reminds me of a story I often tell. Manufacturing client of mine with about 1500 employees is told by a Fortune 50 company that if it is going to remain as its supplier anywhere, it is going to have to become its supplier in Asia too, and that will mean a plant in China. So my client goes over to China with four very talented execs, with a combined 100 or so years experience in the industry and they meet with 4 or 5 China companies to discuss partnering.

They return to the US and we all meet. They tell me about the companies with whom they met and they clearly did not like two of them and they were clearly lukewarm on one of them. They really liked two of them for different reasons. So I listen to all this and then they turn to me and ask me which one I should choose. My first thought was "why in the hell are they asking me." But since the lawyer is supposed to have all the answers, I thought more deeply, and in the most zen-like way I could muster, I told them their choice should be no different than if they were choosing a partner in Peoria. They immediately looked hugely relived, as though I had just told them that maybe their 100 years experience actually applied in China. They ended up deciding to talk further with the two companies, and then ended up partnering with one of them and that partnership has been chugging along nicely for a few years now.

The point of this story and of your comment as well (I think) is that business is business and though China is somewhat different than other countries, it is not Mars and business is still business. The same thing holds true in the legal world as well, which has just given me another blog post topic.

Which brings us to this post.

China's view on foreign investment has changed in the last year and this change has not been for the better. Five years ago, China welcomed foreign investment at about a level 9 out of 10. At that level, China seemed glad to get just about any business into the country and it was quite lax on a lot of things. Immediately preceding the economic downturn, it was welcoming foreign investment at about a level 8. At this level, China would welcome most business with a decent job to pollution ratio. At the beginning of the economic downturn, China moved to a level 9 as its fear of job losses seemed to take precedence. During this period, China seemed to welcome any foreign business action that would contribute to jobs or at least not lead to a decrease in jobs.

Now, the attitude we are seeing is that "we are China," "our economy is strong," and "we do not need you." And we are getting comments to back this up. We recently formed a high technology WFOE and it was not easy. A year ago, this company would have been the exact sort of company China would have welcomed with open arms. The company is truly on the cutting edge of technology and it will be creating at least 30 high level tech jobs quickly. Yet the local authorities seemed strangely uninterested and, at one point, when we noted that they were requesting a document from us that they had never previously requested from us in our last ten or so company formations at their office, they flat out told us that things have changed and China is strong now and we comply with their request or the registration stops.

We complied and the registration went through.

I have ten of these stories, all within the last six months. I mention these changes in China's foreign investment climate because our reaction as lawyers has not been not to change what we have been doing in China on the legal front, but to simply step up what we have been doing all along. In other words, if ten documents are going to be required to accomplish a China legal objective, when nine used to be more than enough, we will produce ten. No different from what lawyers do everywhere in the world. The point is that China legal is the same as China business in that the key is not to change everything because it is China, but rather to rely even more strongly on the core elements of each.

What do you think?

And if you want to read more on China's always evolving Foreign Direct Investment "standards," check out the following:

-- "China FDI: Quality Not Quantity" (12-2007)
-- "Foreign Direct Investment In China: It All Just Changed" (3-2008)
-- "The Latest On Foreign Direct Investment (FDI) In China" (1-13-2009)
-- "Foreign Direct Investment In China. The Times Have Changed. For Good" (4-27-2009)

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Not sure why, but I have been dealing a lot lately with China trademarks. I think it might be because in the last year or so, we have seen an increase in the ratio of our clients seeking to sell product into China as opposed to manufacturing it.

The key to understanding Chinese trademark law is to understand that the first to file for the trademark virtually always gets it. There are some exceptions to this rule and I might win the lottery tomorrow.

U.S. trademark law is based on first use. This roughly means that the first person/company to use a trademark for a particular category of product or service gets it. Most countries, including China, grant their trademark rights based on who files first. This roughly means that if I am using "my" trademark in China for a few years and someone else goes off and registers that same trademark for themselves, they will almost certainly get it. And once they get it, it is theirs and that means they have every right to stop me from using it.

U.S. based manufacturers tend not to think in trademarks because to a large extent they have never had to do so. U.S. based consumer product companies are more focused on brand names and so even though they too can generally (please note the use of the word generally here because there definitely are advantages to filing your trademarks in the United States) able to get away with not filing trademarks in the United States, they do tend to be knowledgeable on the benefits of doing so.

China does have a well known trademark exception to its first to file rule, but since the odds of anyone prevailing on that are so slim and the legal costs so high to even try, it is never a good idea to forsake a filing in reliance on that. Earlier this year, China's Supreme Court issued an explanation of the issues arising in disputes relating to well known marks here [in Chinese only]. In its explanation, the Court defined the term “well known mark” to mean a mark generally known by the public within China. This means the mark must be known to the general public, not to a restricted group of experts, and it also must be well known within China. United States, Europe and elsewhere simply do not count.

Oftentimes when I stress to my clients the necessity of registering their trademarks in China, they respond by asking what the point is when "everyone knows China does not protect intellectual property." To which I always respond by talking about how the protection of copyrighted material (like books and software and movies) in China is bad, but its protection of patents is not all that bad and its protection of trademarks is actually pretty good. Certainly China is rife with trademark violations, but the bottom line is that the enforcement of trademarks in China has gotten pretty good and it is continuing to get better.

For more on trademarks in China, check out "Which Comes First, The China Trademark Or The China OEM Contract?" and "Hey Sucker, We've Got Your China Trademark And Your're Goin' Down."

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Evan Osnos's most recent New Yorker article [this is just an abstract, you will need to pay $4.99 or subscribe to see the full story] is so chock full of juicy China law and business (and even tax) tidbits I just know I am going to be rambling a bit in this post. So to make it at least somewhat readable, I am going to take the unprecedented step of breaking this post into sections so I can really ramble, completely guilt free, yet with some semblance of cohesion. Please do not turn away for fear of rambling, for if you stay, I guarantee you will learn plenty. I guarantee it.

SECTION I. I Love Writ Large. I have said it before and I will say it again: the best articles on how to do business in China are those that talk about the trials and tribulations and successes of a particular business. It is easy and not unimportant to say something like how one must conduct due diligence on your China partner, but if that sort of advice is going to stick with you, you need some great story as to why. At least I do.

I got a complimentary email just yesterday from a reader who touted our "anecdotes" that he "would not be able to get any other way." I emailed back with the following:

I just wish I could share more of them [anecdotes]. As it is, I usually need to wait a long time and then camouflage them so nobody knows of whom I am speaking, especially the clients/near clients.

The funny thing is that we’ve had only one complaint and that was from some tiny American company in China that told Steve (my co-blogger based in China) it was pissed off at me for having talked about them in a post. The weird thing is that I had NEVER once communicated with this company and Steve had done so only once and he had NEVER told me anything about that conversation (not even that it had taken place) and I never even knew this company existed, much less knew anything about them that would be blog-worthy. So to this day I have no clue even what they are talking about or to which post they have their beef. But that’s what’s so great about the anecdote posts -- they absolutely apply to far more people/companies than just the one or two or three companies of which we am writing.

SECTION II. China Taxes and Going Offshore. We seldom discuss taxes on this blog because they tend to be boring and they tend to be so particularized to one's own particular situation that posts would end up having to be super long to be very helpful. It also bothers me how many small and start-up companies focus too much on taxes and not enough on setting up a strong and legal foundation for generating profits. One of my mentors when I first started practicing law used to tell me that the start-up company that wants to talk more about taxes than anything else never makes it. He would analogize it to the wide receiver in football who starts running away from defenders before he has caught the ball. I too am always surprised/unimpressed by companies that seem more concerned about how to avoid paying taxes on money they have yet to earn and may never earn than on how to set themselves up so that their operations can thrive.

And going "offshore" plays into this. Many years ago, a company came to us with forty or so offshore companies. Yes, forty. I asked them how all these companies were working for them and they said they were a "pain." I asked why they had set up so many companies and got a somewhat convoluted explanation that I translated to mean that this company's previous lawyers and accountants had, over time, convinced them of the need for each of them. Note that lawyers and accountants have a bias for advising you form lots of companies. They/wenot only make money in the formation, once the companies have been formed, their upkeep becomes a virtual annuity. To make a short story even shorter, we consolidated the forty companies into five and we get "thanks" for this nearly every time we speak with this client for having saved them considerable time, headache, and money.

Anthony Noto, a Shanghai based Financial Planner for expats (mostly) recently sent me an article he wrote for CFA magazine on the potential perils of investing offshore, entitled, "Siren Songs: offshore investors are sailing in treacherous waters." and "Offshore Misconceptions."

I am NOT saying there is no place for offshore investments and offshore companies, because there most certainly is. But you should be wary of an adviser who seems overeager to set you up "offshore" or who touts going offshore as a panacea. Always weigh the costs against the benefits.

SECTION III. China Taxes.Yes, Again. But This Time With Even More Feeling. In the last six months or so, China has become so serious about collecting taxes that I estimate my firm's work on such matters has tripled. My firm does nearly all its work on a flat fee basis. And about half the time when we do not flat fee a matter, we do it hourly with a billing cap. We were doing this before the BigLaw crash and we are used to it. Being used to it means we are usually really good at figuring out a fee that is fair for both our clients and for us.

But what we are finding on our more recent China tax/customs matters is that they are taking about twice as much time as we anticipated and that is because they have become not so routine as China is really starting to crack down on foreign company tax reporting. In particular, China is auditing/not trusting valuations and it is holding up all sorts of things to confirm pricing. We are especially seeing this in transfer pricing, where the Chinese tax authorities have been told from above (Beijing) to generate more taxes and they are absolutely seeking to do so by questioning transfer prices between foreign companies and their related Chinese entities. China seems to be issuing a new circular on transfer pricing every other week. We will write more later on how China's massively increased enforcement of its tax laws is having profound impacts on foreign companies doing business in China, but for now, suffice it to say that it really really is.

SECTION IV. China in the Mainstream Media. I used to complain fairly often about the quality of reporting on China, but then things started to improve, I started confining my reading to only the better publications, and I also may even have mellowed out a bit. But the overly harsh and uninformed criticisms of President Obama's trip to China made me realize anew how so many of the people writing for the MSM do not know much about that which is outside their own countries. Three things really bothered me about much of the reporting on Obama's trip. One, that the stories purported to know what was going on behind closed doors and that Obama had achieved nothing. Two, that they failed to understand that using a bludgeon against China has a long history of ineffectiveness. Three, many of them sought to contrast Obama's conciliatory approach with the ineffective bludgeoning approach used by GW Bush, but Bush did NOT use a bludgeoning approach with China during his second term.

Anyway, if you want really good writing on China, you should be reading the Atlantic for James Fallows, and the New Yorker for Peter HesslerandEvan Osnos. You should also be reading the Wall Street Journal, The Financial Times, Forbes, Business Week, The Washington Post, the Economist, and the China Economic Review as those are the places in the mainstream media where you will consistently see well-written, accurate and informative writing on China. The New York Times is fine too, but its "when in Shanghai, one must dine at Jean-Georges approach" tends to turn me off.

And speaking of Osnos, and speaking of the main purpose of this post:

SECTION V. China Business Today, As It Really Is. Taxes Too. The November 23 issue of the New Yorker has an absolutely great article by Evan Osnos, in his Letter from China series, entitled, "Reds" [this is just an abstract, you need to subscribe for the full article]. The article is both fascinating and informative. If I could write like Osnos, I could have and would have written ten such articles, it is that true to life.

The article is about Donald St. Pierre, Sr., who founded A.S.C. Fine Wines in Beijing in 1996, and has taken that company to amazing heights, but who also faced (and mostly beat off) serious customs claims/charges of "falsifying prices" for customs purposes. The article does a great job explaining how A.S.C. so deftly managed to market its wines in China and should be read for that alone. But the parts on how the legal landscape of doing business in China has changed so drastically over the years were what really grabbed me.

The article talks about how it was believed that many (most?) in the wine business were under-reporting the prices they were paying for their product and of how the wine industry, like so many others, had grown too fast for Chinese regulators "to keep pace." When China really stepped up enforcement against those in the wine business, it secured "punishment" in 29 cases (presumably against 29 different, mostly foreign(?) China wine importers).

Why did so many companies think they could get away with violating China's laws? Donald St. Pierre has the absolute right answer:

When you first start doing business in China, "No one sits you down and says, 'You've arrived in China. These are the laws.' Because people just don't think they apply to them! And they do now.

Donald St. Pierre's son, Donald Jr., makes a similarly prescient comment:

I think what we went through clearly shows that if you are engaged in business you are subject to the same rules as everybody else.

SECTION VI. It is Very Relevant. Trust Me. The next time somebody insists to me that they do not need to abide by China's laws (and trust me, there will be such a next time and it will no doubt be fairly soon) because they have such a great reservoir of guanxi or because some local official will be giving them cover or because they are aware of some other company that has gotten away with doing the same thing for years, I am going to tell them to spend $4.99 to download Osnos's article from the New Yorker. Donald St. Pierre had massive guanxi yet he ended up spending time in a Chinese detention center and his company incurred a six figure fine.

China has laws (plenty of them and they are ever changing as well) and they do apply to foreign companies and individuals (more so than to domestic companies) and a failure to abide by them can lead to trouble. And this has become particularly true in the tax and customs arena.

I guarantee it.

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I am always preaching how foreign companies must register their trademarks in China if they are going to be doing business in or producing product in China (see, for example, "China Trademarks -- Do You Feel Lucky? Do You?"). And in most cases, companies should register their trademarks in China now. Right now.

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 other company gets the trademark. And then, armed with the trademark, that company has every right to stop your XYZ shoes from leaving China because they violate its trademark.

But saying a company must register its trademark if it is going to do business in China does, at least to a certain extent, beg the question as to when that company should register the trademark. I always tell our clients and potential clients that they should register their trademarks right away. My thinking on this is that if they are going to be doing it anyway, they should do it right away so as to make sure nobody beats them to it.

But what if you are an American company that is thinking of introducing your product into China in a couple of years? What do you do? Well if you are a massive company with a lot of money, you go ahead and register your trademark right now. But if you are a small company, spending the money now may or may not make sense. Where and how do you draw the line? There is no one answer here; it is more a case of knowing it when you see it.

I thought about all this yesterday because I received a call from a small company that was referred to me by a China sourcing company we represent. The China sourcing company had the foresight to tell this other company (let's call it Company A) that it needed to register its trademark in China before the sourcing company started going out and trying to find manufacturers for Company A's product. But when I spoke with Company A, it immediately became clear to me that its funds were very limited and that it was very unsure if it would even be able to find a manufacturer at a price that would make sense and if it did find that manufacturer, whether its product would catch on in the US or not. Company A's not unreasonable plan was to make a limited quantity as a test run and then, if that worked, secure financing to ramp things up.

Company A: Is a trademark really necessary in China?

Me: It is necessary if you are going to be sure to protect yourself from someone taking your name from you. How important is your name to you? If someone takes it, could you stamp a different name on your product for the next go round?

Company A: I really like our name, but I could always come up with a new one if that were to happen. Do you really think someone is going to register our trademark right away in China?

Me: The odds certainly favor you, but you just never know. You can consider waiting until after you see if your product will have legs.

Company A: I would prefer to do that. Am I taking a huge risk?

Me: A lot depends on whether the worst case scenario of having to come up with a new name is terrible for you or not.

You will never get me to say anything other than how important it is to register your trademark in China right away (because I do not want anyone to be able to blame me if "their" trademark is registered by someone else), but obviously the decision on when to register is sometimes a bit more complicated than that.

What do you think?

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I am going to have to be vague almost to the point of incoherence here, but if you keep reading, you will understand why.

About three years ago, we brought a very large lawsuit in China, using one of our favorite Chinese law firms. We are representing the plaintiff on this case and we are claiming that another foreign company (with a very large China presence) made a mistake that cost our client. The mistake involved shipping and the issue is a really important one for China. The law ought to be clear and it ought to favor our client, but the Chinese courts have been very reluctant to rule.

We have been stuck at the highest level court of the province (a relatively sophisticated province) for about two years now. The court kept trying to get the parties to settle and that has gone absolutely nowhere. Now the court keeps delaying its ruling, saying the decision is important to China and important for China's foreign affairs.

And so we sit. And sit. And sit.

This is the first time anything like this has ever happened to me and I am wondering if we will get a ruling in my lifetime. Our Chinese law firm has a great relationship with this court and is in constant touch with them and they too are very frustrated.

And so we wait. And wait. And wait.

Ugh.

Anyone else have a similar story?

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Andrew Hupert over at the Chinese Negotiation blog did an interesting and helpful post on negotiating strategy in China in a post entitled, US-China Variation of Prisoners Dilemma -- The Factory Game. In his post, Andrew, who teaches at New York University's (NYU) Shanghai campus, discusses in detail the experiment he did with his students and the results of that experiment.

More importantly, he then sets out five good lessons American businesses can learn from relating to their business negotiations with Chinese companies:

What lessons can US negotiators in China draw from this exercise?

1 – Set the stage for trust, or you will poison the potential relationship from the start.
Test orders are an American concept while systematically building relationships is Chinese. Americans assume that the relationship will grow from successful transactions. Chinese assume that successful transactions will grow from relationships. The result is that Americans tend to under-promise (“we’ll have to see how well you do on the first order before we discuss raising the volume”) while the Chinese over-promise (“oh yeah, we can definitely do what you want at the right price and quality level” – even if they don’t know what they are doing – yet). Both behaviors tend to undermine trust in the early stages of a US-China business relationship.

2 – Penalties and missed bonuses are often interpreted by Chinese actors as ‘cheating’ behavior – and a betrayal of trust.
Americans often employ the ‘carrot and stick’ technique of using potential bonus payments and penalties to enforce positive behavior. Unfortunately, Chinese counter-parties often view this as dishonest and manipulative. It is human nature to count the bonus and ignore the penalty during the pre-execution phase of the deal. Once trust is lost, it is very difficult to restore. A missed bonus – regardless of how justified the American side feels it to be – often triggers negative behavior from the Chinese side.

3 – Guanxi-building activities like dinners, tours and meetings are the Chinese method of vetting partners.
You should be doing the same. Use your banquet time to talk about how you and your counter-party define success. What are your goals? How can you work together? American negotiators are often shocked at how much time the Chinese waste on relationship building. Chinese negotiators are equally shocked at how much opportunity the Americans waste by not building proper relationships.

4 – Overly picky contract terms tend to be counterproductive.
Your corporate lawyer thinks you can write-out the risk of overseas deals, but in China this can be counter-productive. Detailed contracts with penalties and financial stipulations can make the Chinese side feel that you are not a suitable long term partner. Contract terms that seem normal in the US can trigger the “cheat” switch in China — since they think you are already pulling fancy tricks.

5 – Relationships are not organic in China.
Americans tend to feel that close relationships are the product of positive experience and time. Chinese negotiators are a bit more transactional, and expect partners to ‘work at the relationship’ in the early stages. Don’t blow an opportunity by paying lip-service to your Chinese counter-party. When they say, “we want to have a good relationship” it isn’t necessarily a pro-form business platitude. Use the opportunity to define slippery terms like ‘trust’, ‘success’ and ‘long-term’. Assumptions can be lethal in a cross-cultural negotiation.

My experience concurs with all these suggestions and I am going to speak to Andrew's Nos 2 and 4 because those relate most directly to my role as lawyer on foreign-Chinese transactions. My experience is contractual bonuses are frequently misunderstood and oftentimes do create unexpected problems. For whatever reason, Chinese companies frequently seem to be of the view that if a contract provides for a bonus for achieving a particular goal, getting close to that particular goal warrants the bonus, or at least a strong request that it be paid. I also agree with Andrew on the penalty front, but with a pretty big caveat. Our experience has been that they can be quite effective, not so much in their enforcement, but in their keeping the Chinese factory or counter-party's feet to the fire and, when things go wrong, as a leverage piece to force a quick discussion of how things will be resolved. In other words, their strength lies not so much in their enforcement, but in their availability as a leverage tool to get things done.

I also agree with Andrew's view on what he calls "overly picky contract terms." I have always had the sense that the typical Chinese company views the length of the contract as being inversely proportional to the strength of the relationship and though it is important that the contract have all of the critical terms, this is a big incentive to keep it as short as possible. One other thing Andrew hints at here is that Chinese companies typically do not interpret contracts as technically as do Americans. A great example of that is joint venture contracts. If an American holds 51% of a venture, it assumes it pretty much controls everything, whereas the Chinese company might well view that split as simply giving the American the right to 2% more of the profits.

Let's hear your China negotiating stories. What are you seeing out there?

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I have a new rule. When I get three or more emails on a topic, and at least one of them says something like the following:

"Dan, I am sure you are familiar with the recent Microsoft case and already planning to blog on it, but...."

I am going to blog on it even though I don't want to and even though I have nothing to say on it -- none of you better be thinking, yeah, what else is new?

Yes, I have read about the China Microsoft decision. Yes, Microsoft is in my backyard. Well not literally, but even though I live in the city of Seattle and Microsoft is in the far away ex-burb of Redmond, my house is surrounded on all four sides by Microsofties, as we call 'em. And yes, I have read a bit on the decision, but almost all of what I have read has been pretty much nonsensical in its legal analysis.

But, having said all that, I really do not know what to say about it. I have seen articles assuming the ruling favoring a Chinese company over Microsoft is proof positive of how a foreign company cannot get a fair trial in China. And I have seen articles assuming the ruling favoring a party suing for IP infringement means China is advancing to Western standards of IP protection. The reality is that this is just one case and from what I can tell about it (which is, quite honestly very little because I have not read the decision itself) is that it seems like just your normal decision based on the facts and the law. My tentative opinion is that this decision will have no lasting meaning beyond the parties to the case. Everyone just move along.

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In going through old emails this weekend, I came across a rather old email from a long time client/friend, entitled, "You should write about these idiots." I swear this is his language not mine. Anyway, attached was a link to a 2008 USA Today article, entitled, "The Pitfalls of China's Rough Capitalism" that is still very much topical today. The article is about a couple of Americans who purchased dolls from a Chinese manufacturer that were in violation of US copyright laws. The two Americans were sued by an American company that owned a copyright on the dolls and they blamed the Chinese company for having told them it was their own original design. One of the owners of the U.S. company poses this question: "When you're in China, how can you check on copyrights?"

Where do I even begin?

Well, for starters, call or email your US lawyer and simply ask him or her. It is sheer lunacy to rely on a foreign non-lawyer for your US legal advice and that is exactly what these two people did here. Now I am absolutely not absolving the Chinese company of blame for having lied, but if you are going to be doing business in China (or anywhere else for that matter) it is in the end always going to be up to you to protect your own business.

Yet I see this sort of thing all the time. I have "seen" people enter into major deals relying solely on their Chinese counterparts for advice. To wit:

-- US company starts manufacturing product in China and then ships it to the US, only to learn that it contains a chemical banned in the US. Wants my law firm to sue the Chinese company over this because the US company "just assumed" the Chinese company would operate legally. My comments that the Chinese company was operating legally, in China and in about half the world, seemed to fall on deaf ears. We turned down the case.

-- US company told by their Chinese manager (not a lawyer) that 1) no need to pay employee benefits; 2) no need to have a written employment contract; 3) no need to register the business as a proper WFOE; 4) No need to pay China taxes; 5) no need to register the company's trade-name in China. This is an amalgamation of what I am constantly seeing and though this sort of thing may work for Chinese domestic companies, it seldom works long for foreign companies. Chinese domestic non-lawyers are not expert in international law.

-- US company signs English language agreement with Chinese company saying Chinese language agreement will control. US company trusts Chinese company to do the Chinese translation. US company never checks the Chinese translation until it is thinking of suing and, guess what? Chinese contract and US contract are very different. I have seen this twice. Not kidding.

-- US individual believes Chinese girlfriend (sorry, but we have seen about a half dozen of these and all have been girlfriends) that China does not allow foreigners to own property so US individual buys condominium for "the two of them" under the girlfriend's name. Within months, the Chinese girlfriend breaks it off and claims the condo was a gift. US individual is always surprised to learn that making the argument that this was not a gift is going to be extremely difficult because he actually qualified to buy Chinese property and who is going to stand up in a court and say "I did it this way so as to avoid the law, no please compensate me now that it has gone wrong."

-- US company ordered a part to be made of 20% stainless steel. US company did not perform any QC checking before shipment or sale and only learned that the product was about 5% stainless when customers started complaining of rust. By the time we were called in to try to help this US company recover its money, the Chinese company was no more.

-- US company goes "into partnership" with Chinese entity to run a Chinese magazine, but because foreigners are forbidden from doing this, the US company eventually gets pushed out.

-- A company that was going into a Chinese joint venture we knew was structured illegally, but because some low level local government official had said it was okay, the company would be going forward against our advice. We told them we had no interest in representing them.

I can go on and on, but all of the above have one thing in common and that is that the US company relied pretty much entirely on the Chinese company side for advise that probably should have come from anywhere other than the Chinese company with all sorts of incentive for brushing potential problems under the carpet.

I am definitely not telling you never to trust your Chinese partner, but I am saying that you need to verify everything on your own.

And in that spirit, I present you with the second part of the USA Today story, that of Frank Carroll, an Irish "furniture seller," who was a lot smarter in his due diligence and whose story is more instructive. Carroll "worked with a family-run factory" with whom he got so "he was invited to the matriarch's birthday party at the family's luxurious compound with swimming pool and snooker table." Despite this, Carroll's quality control worker discovered that the Chinese manufacturer was using foam that did not meet Britain's flame retardant standards.

The factory owner and his brother at first denied that the contract specified that the product meet the particular British standards and when Carroll showed them that their contract proved otherwise, the Chinese company stalled for time:

Later, the mother, father, three brothers and two of their wives showed up at Carroll's hotel.

"They weren't willing to fix the problem," he said. "They said, 'Can't you sell these chairs anyway? We won't tell anyone. Nobody will know.'"

One of the wives began sobbing and urged him to forgive her husband and take the chairs as a face-saving gesture.

Carroll refused: "Had I been found out, my business would be dead. If one person found out, I'd never be able to trade in the U.K. again."

It wasn't the last time he saw the chairs. "At a furniture fair six months later," Carroll said, "they were selling the chairs at a discount price."

The experience didn't scare him away. The trick is finding good factories and micromanaging them, said Carroll, who splits his time between Guangzhou and Dublin.

Carroll's right. It's your job to micromanage and stay on top of everything.

What do you think?

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My law firm has in the last few months been called in a couple of times to assist other law firms in defending federal criminal actions here in the United States arising from Chinese imports. These two cases are still very much pending so I cannot discuss them in any detail. However, they have taught me a couple things regarding United States criminal law, one of which I found really surprising. Here goes:

This was the big surprise. Federal statute, 21 U.S.C. § 331(a), prohibits “[t]he introduction or delivery for introduction into interstate commerce of any food, drug, device, or cosmetic that is adulterated or misbranded." This statute is a strict liability statute, which means you can be found guilty of violating it even if you had no intent and no knowledge regarding the crime. In other words, if you import adulterated or misbranded food or drugs into the United States, you can be found criminally liable even if you had no idea of any problems. A violation of this statute is a misdemeanor punishable by up to one year imprisonment, a fine of up to $100,000 ($200,000 for a corporation) and up to one year of supervised release. The penalties can be even higher for a second violations and for violations with “intent to defraud or mislead."

I just thought you should know. Did you?

US criminal lawyers, weigh in please.

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China Observer just did a fascinating post, entitled, "Reverse Innovation: Made in China - For China," on foreign companies innovating for China. The post is written entirely from a business perspective and its gist is that because you cannot just take a high priced product made for a wealthy country and plop it into a country like China or India, you must glocalize it:

Glocalization is a combination of “globalization” and “localization” and is the traditional approach adopted by multinationals. Initially for US companies “going global” meant developing products in the US and localizing them for European and Japanese markets where local consumers have similar purchasing power. Govindarajan argues that the consumer markets of emerging economies like China and India are fundamentally different from those of developed countries. He questions “How can you take a product that was originally designed for a US consumer with a median income of $50,000 and profitably adapt it for a middle-class consumer in China whose earnings are significantly less?

But glocalization can have serious legal and other implications that should be considered.

A few years ago, I represented a medical product manufacturer that made a relatively high end, very profitable and ubiquitous product for doctors and hospitals. For confidentiality reasons, I am going to have to stay really vague here, while keeping the thrust of this story intact. This product sold for about $200 in the United States and in Europe, but my client saw a massive need for this product in places like Africa, India, and rural China. But it knew $200 would be way out of reach for these places. On top of that, this item needed to be sterilized after each use, making it not only cost prohibitive for the world's poorest regions, but also not a good choice medically.

So my client developed a disposable version of the same product and had it made in China at a price point that would allow it to sell them for less than $10 a pop. But that is hardly the end of the story.

Though the disposable version would no doubt save lives by bringing a medically important product to regions that previously lacked it, this sort of massive product differentiation in a high risk area like medical treatment can have massive legal and public relations implications for a Western company. Just some of the questions we had to consider:

1. What are the legal ramifications if a Westerner gets poor treatment and a subsequent injury using one of the $10 devices? What happens if this happens in a place like Ghana? What happens if someone starts reselling these $10 devices into Western countries like the United States and someone gets injured there? What are the legal ramifications if someone sues my client in someplace like Pakistan, claiming that they were provided with an inferior product simply to save money? What happens if physicians re-use the device against all instructions? What happens if hospitals seek to sterilize the device, against all instructions? What if the $10 devices are improperly disposed of and that leads to the spread of disease?

2. What are the public relation implications if my client gets sued (or even if they do not get sued) if people start complaining how company X cares far more for the people in the United States than it does in rural China? I know this sounds silly on one level, but trust me this sort of thing does happen and it is why so many top companies maintain worldwide standards in various areas like environmental and human relations.

Though I cannot reveal how my client ended up resolving these above issues (again, I do not want to say anything that might allow anyone to figure out the company I am discussing here), I throw them out there (and there were plenty more) just to give a flavor of how creating a "lessor" product model for a developing country can have ramifications that extend far beyond just production, pricing and sales.

What have you seen out there?

UPDATE: Kenneth Ross, a product liability prevention attorney in Minneapolis, sent me an article he wrote for the Defense Research Institute's (DRI) Product Liability Committee Summer 2009 Newsletter, entitled "Is There Anything Optional About Safety?" This article addresses the safety and product liability issues that can arise from one company having the "same but different" product around the world.

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I have been in a long running discussion with an international lawyer (with whom I have worked for nearly a decade and who I greatly respect) in an emerging market country who believes American companies are too straight-laced to succeed in places like China. And by places like China, he would mean a place where law enforcement on businesses is, shall we say, spotty and uneven. He and I fundamentally disagree on how American businesses should behave in "places like China" and I attribute it to his lack of knowledge regarding what American businesses must contend with both at home and in China. He, no doubt, attributes my views to naiveté .

Here's the dispute. I am of the view that the best way to maintain a long term business anywhere in the world is to obey all of the laws in whatever country the business is located, if doing so is reasonably (or even somewhat unreasonably) possible. My attorney friend thinks companies should go completely local and act no better than the local businesses act. When I point out to him that foreign companies are always going to be more visible and more susceptible to being targeted overseas. He pretty much just says, "so what, they need to do these things to compete." When I point out that of all countries, American companies are probably held to a higher standard overseas than any other, he says that needs to change.

Who is right here and why? And do not just say the best position is somewhere in between because that is always going to be at least somewhat true.

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China Law Insight blog has a fascinating post (for we nerd lawyers anyway), entitled, "PRC Web Page Notarization for Evidence," on what it takes to get a webpage into evidence in a Chinese court.

The post starts out noting how web-based information is increasingly being used as evidence in Chinese judicial proceedings and how that evidence is stored inside a web server in the form of electronic data. It then talks about how the courts require web-based information be verified by a notary. But if the downloading of the web page was not conducted properly, it will not be deemed authentic and will not be permitted into evidence. Proper downloading requires more than just a notarization that the downloading was witnessed; it must also include information proving the page actually came from the internet, and not from a page previously downloaded from the internet but still in the computer users cache:

In the NuCom Online (Beijing) Information Technology Co., Ltd. v. ChinaNetwork Communications Corporation Limited, Zigong Branch case, the Supreme People’s Court emphasized, in its (2008) Min Shen Zi No.926 Civil Ruling, the necessity of examining the origin of web-based information, as said origins are fundamental to deciding whether the notarized evidence can be used as the basis for a court’s judgment. If the notary public cannot gain access to the computer or mobile hard drive before the notarization procedure and if the notarization itself does not include a record of the state of the computer or mobile hard drive with respect to the integrity of said computer/mobile hard drive prior to the downloading, the Supreme People’s Court deems that the notarization can prove that the act of downloading occurred before a notary public, but it cannot prove that the data at issue was actually downloaded from a specific location on the Internet.

Under certain scenarios, when you use a local computer to visit a target website, the web pages displayed are actually those stored or cached in the local computer, rather than web pages downloaded from a remote website. Therefore, the actual origin of the evidence cannot be guaranteed merely by having a notary public witnessing the downloading process, as that “downloading” may be simply pulling up the web page from the cache in the local computer.

The post goes on to describe what parties must do to ensure they can get their webpage in as evidence before a Chinese court:

To ensure proper authentication of web-based evidence, parties should conduct notarized web page downloads at the notary public office using the notary public’s computer and, also, request that the notary public record the condition of the computer prior to the notarization process. If the downloading must be done on another computer, the party should initiatively request the notary public to delete all relevant files from the caches of the computer by appropriate procedures before downloading the requested web pages and record all of the detailed steps in the notarization process.

Now I would expect one has to be a lawyer to appreciate the significance of this, but I know that these days I am constantly using web based evidence in my cases all around the world, but much more casually in the United States. In an international litigation matter my firm is handling in a United States federal court right now, one of the defendants claimed to have insufficient contacts for the court to assert jurisdiction over it. This European based defendant claimed it had never advertised its product for sale in the United States and had sold only really one product. We researched this company on the internet and found multiple instances of where it was listed on directories for selling their particular product in the United States, including one that required payment. We also found internet proof of their having imported product into the United States for delivery to a company listed as one of their European subsidiaries on their website. We used a lawyer's declaration to set out these sites for the courts, presuming that if the court had any doubts, it could check out the sites itself.

Had our case been in China, we apparently would have needed to bring in a notary public who would need to go through the steps set forth by China Law Insight above. Yet, in certain circumstances, where the date of an internet finding might be crucial, I can see where these same "Chinese" steps would actually make sense around the world.

What do your country's courts require for admittance of internet evidence?

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Chinese ISPs are often criticized for removing content from their sites that anyone suggests may be defamatory or violate some other party's intellectual property rights. This criticism is not really justified because Chinese law essentialy requires ISPs to take this action or be jointly liable for the offense. Article 36 in the Draft Tort Law succinctly states the current rule on ISP liability:

第三十六条. 网络服务提供者知道网络用户利用其网络服务侵害他人民事权益，未采取必要措施的，与该网络用户承担连带责任。网络用户利用网络服务实施侵权行为的，被侵权人有权通知网络服务提供者采取删除、屏蔽、断开链接等必要措施。网络服务提供者接到通知后未及时采取必要措施的，对损害的扩大部分与该网络用户承担连带责任。

Article Number 36: If an ISP knows its user has used the ISP's network to infringe on the civil rights of another person and does not take appropriate action, then the ISP shall have joint liability together with the user. In a case where a internet user makes use of the network to engage in infringing activity, the infringed party has the right to give notice to the ISP to take necessary measures such as deletion, blocking or termination of service. After receiving such notice, if the ISP does not take act immediately to take such remedial action, then the ISP shall have joint liability with the the user for all increase in damage.

This rule is almost exactly the opposite of the rule that applies in the United States. Under the Chinese rule, once an ISP receives a complaint, it is obligated to act immediately to take remedial action. If the ISP fails to act, the ISP is jointly liable for any damage. Though there may be no damage there is little to no benefit to the ISP to take the risk of leaving the potentially offending material online. Therefore, prudent ISPs operating in China typically immediately remove any item any person has claimed to be infringing. This very same rule applies to websites and blogs.

Foreign companies and individuals that engage in internet activity in China should be aware of this rule. You are not operating under protections of online speech similar to the United States. For example, under Chinese law, a blog owner is considered to responsible for all comments appearing in the blog and is therefore subject to this rule. If the blog is visible inside China, its publication is deemed to be in China and the above rule applies.

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Earlier this month, China's National People's Congress released a discussion draft for a "new" Tort Code. The Draft Tort Code contains little that is new and even less that is interesting. China already has a very complete and complex system of tort law, and even if passed into law, the Draft Tort Code is unlikely to make a dent. The Draft Tort Code merely repeats in fragmentary form what already exists. Whether China adopts the Draft Tort Code or not, is not important because China already has a full system of tort laws. The standard three volume treatise on Chinese tort law by Yang Lixin 杨立新 is over 2,500 pages long. The draft tort law is only 25 pages long. There is simply no way this law will have any impact on tort law in China and one even has to wonder why the People's Congress is even bothering with it.

To give a few examples:

-- Article 22 of the Draft recognizes the right to emotional damages. Though this is a major issue, China's Supreme Court granted that right back in 2001. See 最高人民法院关于确定民事侵权精神损害赔偿责任若干问题的解释 where the Supreme Court explained various issues arising from recognizing the right to emotional damages in civil tort matters. A copy of this decision can be found, in Chinese, here.

-- Article 55 of the Draft sets forth an informed consent requirement in medical matters. Again though, this has already been recognized in China. See Article 11 of the Medical Malpractice Rules[in Chinese], 医疗事故处理条例, issued in 2002 .

-- Article 34 of the Draft states that employers can be vicariously liable for the torts of its employees. Again, this is nothing new, as China's Supreme Court first set out this obligation in 1988 and it did so again in 2003. Vicarious liability is a core principal of Chinese tort law.

-- Section 8, Articles 65--68, of the Draft provides for liability for environmental pollution. This obligation is already provided for in Article 124 of the China's Basic Principles of Civil Law and it is dealt with in great detail in various pollution control laws, such as the Law on Prevention and Control of Air Pollution, the Law on Prevention and Control of Water Pollution and the Law on Prevention and Control of Pollution from Environmental Noise.

-- Section 5, Articles 41 -- 47, provides for liability for defective products. Liability for product defects was already provided for in Article 122 of the Basic Principles of Civil Law and has been dealt with in further and great detail by such laws as the Food Safety Law and the Product Safety Law.

The same applies to the Draft's provisions on medical malpractice and on traffic accident law: China's existing law already covers the field in great detail.

But there is an important lesson to be learned from all this for foreign companies doing business in or with China: do not ignore China's tort laws and do not believe for a second that it has none. For an interesting discussion on this, check out our post from 2007, entitled, "One Night In China And The World's Your Oyster Foreign." Far too often, foreign investors in China operate under the notion that there is no law in China and certainly no real tort law. My concern is that if the Draft Tort Law is not passed (which I predict will be the case), this will only serve to confirm the mistaken impression that China has no tort law.

The opposite is true. China has a fully developed tort system and, unlike some of its laws that are simply "on the books," tort matters are routinely litigated in China. If you are doing business in China or even with China, you should be aware of China's tort laws, particularly as they apply to your business. China's tort law system is vast and complex and continually evolving, as is true of the tort laws in every country with an active and vigorous legal system.

UPDATE: China Environmental Law Blog looks at the draft's impact on environmental torts in China and seems similarly underwhelmed.

UPDATE: Greenlaw discusses the draft here and two law professors have translated it into English here.

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I received the following email (modified slightly to protect anonymity):

Steve,

I wanted to pass some information to you, which you might want to use on your blog, but please keep my name and my company name out of it.

We have been dealing with a staff issue under the new Labor Law. Essentially one of our staff has taken us to the Labor Bureau for unfair dismissal. We have now been trying to pay her off and get a contract signed that she has no further claims against us. One clause we wanted in the contract was to basically get her to keep confidential about our business and especially the business of our clients. The Labor Bureau has advised us that for this to have any legal effect, we need to pay her for the period we wish her to maintain confidentiality.

My reading of this is that all of our confidentiality agreements with our employees are now meaningless because we can no longer ensure our ex-staff keep confidentiality. This must impact all consultancy firms. I thought you might find it worthwhile investigating/blogging on this.

Here is the basic situation. A trade secrecy and confidentiality agreement should be included in every employment agreement. It must be a stand alone agreement, separate from the employment agreement itself. Such agreements only work, however, where the company has a secrecy/confidentiality policy that is clearly documented and enforced by the company. A mere agreement is of only minimal benefit.

It is a major mistake to combine a secrecy/confidentiality agreement with a non-compete agreement. Under the new Labor Contract Law, non-compete agreements are highly disfavored. Only management level employees and employees with special status can be subject to a non-competition agreement. The non-compete agreement can extend for only two years and must be limited in scope, both in terms of geographic area and restricted activity. Finally, the employee must be paid during the entire period that the non-competition agreement is in effect. Failure in any of these areas will cause the labor bureau and courts to reject the agreement as void. We typically advise our clients to restrict their use of non-competes to truly high level employees with significant management responsibilities.

In the case mentioned above, there a several possible explanations:

-- The confidentiality provision was combined with a non-compete. In that case, the labor bureau interpretation was probably correct.

-- If the confidentiality agreement was an entirely separate agreement, then the labor bureau official was not correct. This area of law is frequently misunderstood in China, so this would be disappointing but not a surprise. If the labor bureau has it wrong, the solution is to take the matter to court. That is, if the employee did violate his or her confidentiality agreement and has made improper use of trade secrets, then the employer should consider suing the employee in the appropriate court.

My approach is to use non-compete agreements only in the relatively rare cases where they are truly necessary and are likely to be enforced. On the other hand, I work with my clients to carefully document and enforce confidentiality and trade secrecy agreements with all appropriate employees.

In response to the concerns of the writer of the email above: If the confidentiality agreement is combined with a non-compete agreement, you are correct that the confidentiality provisions are of little benefit to you. On the other hand, if you have separate and properly drafted confidentiality agreements, they are still fully valid. However, they are only useful to the extent that your company has a formal secrecy program that you have carefully implemented, monitored and enforced.

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The Chinese government is dealing with many significant issues relating to the economy and to the climate. The two that concern our clients are food safety and energy conservation. The fact that several different Chinese government departments often have overlapping jurisdiction over the same issue sometimes prevents the Chinese government from effectively dealing with these issues. The usual effect of the overlap is administrative paralysis, which means the problem simply never gets solved.

This issue is highlighted by the recent dispute in China over approval of the Chinese version of the World of Warcraft video game. As reported in a Xinhua article, entitled, "Warcraft game falls into war of gov't departments," one Chinese government agency has refused registration while a competing agency insists it has the right to go ahead. While the agencies battles, the avid gamers who want to play the game are left in limbo. The agency turf battle is leading to gridlock on the approval front:

On Monday, the General Administration of Press and Publication (GAPP) rejected Chinese Internet portal NetEase's application seeking approval for the Chinese version of WoW.

NetEase violated a rule banning new account registration and collection of subscription fees during a trial period that started July 30, when the firm was ordered to "revise harmful content" in the game, the GAPP said.

The ministry-level administration said it might terminate access to the popular online game.

However, in an unexpected twist, China's Ministry of Culture (MOC) on Tuesday criticized GAPP's ban on WoW as "abusing its authority."

"Online games and publications are subject to administration by the MOC," said Li Xiong, a MOC official in charge of market affairs.

Both the GAPP and MOC insisted they are each the sole regulator of the profitable online games in China.

Shi Jie, a lawyer in Beijing told Xinhua Wednesday that more than ten government departments including the agricultural, industrial, commercial, health and quality inspection departments, had their own different regulations on food safety, which made supervision on the issue very hard.

"They fight for regulating powers with each other, but many tend to shrug off responsibilities when food safety accidents occur," said Shi, who is also a member of the National Committee of the Chinese People's Political Consultative Conference.

The much touted new Food Safety Law does nothing to resolve this overlapping jurisdiction. As a result, its enactment has not led to any real change in the food safety area. The only real effect has been the creation of a new layer of bureaucratic red tape, which is good for we China lawyers, but bad for just about everyone else. For more on my views on China food safety, check out this Wall Street Journal article I wrote this Forbes article in which I was interviewed regarding China's milk scandal and this Los Angeles Times article in which I was interviewed regarding food safety problems involving China's fish industry.

In addition to competing agencies, we have also seen many tug of wars between local and national governments. Many times a local government will say "yes" to a deal that clearly violates national law. The less experienced foreign companies assume that if "the government" has given its blessing to the deal, everything must be in order. Unfortunately, we have handled a number of matters where a local government blessed a deal but the national government shut it down months, years and even decades later because it was never legal.

It even goes beyond that. In one region of China in which my firm frequently works, we are constantly having to contend with turf battles at the purely local level. There are fights among the cities in the region over who can outdo the other in terms of promises to foreign companies that in the end will never fly with Beijing. And, get this, we have even had to contend with districts/development zones within this city making promises to our clients that we know the city itself will never accept. The locals will tell our clients, "sure, you can do this," even when they know the city, province, and national rules forbid the activity. Eventually, the approval has to go up to the city government and the "special" privilege gets taken away. What the local guys hope is that by this time the foreign investor learns it has been duped, it will be so invested in the project it will go forward with it anyway.

Needless to say, this makes our jobs as lawyers all that more difficult as we are constantly finding ourselves having to tell our clients that what the government is promising them (which always sounds so good), is in fact fleeting at best. It is human nature to be disappointed when something promised to you is taken away "by your lawyer."

The Chinese government and its advisers are well aware of the problem of overlapping/competing governmental bodies and they know this issue permeates multiple areas of China law and regulation. However, the positions of these governmental entities are well entrenched and there is no indication the problems will be resolved soon. This means foreign businesses must take extra care to determine which agency and which jurisdiction asserts the right to regulate their particular business in China and they must work with all of the players to ensure not being caught between them. The fate of NetEase awaits those who do not pay careful attention to this issue.

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The PRC National People's Congress has been focusing on increasing public involvement in China's lawmaking process. One technique it has been using to achieve that has been to issue draft laws and provide the public with an opportunity to comment on them. The internet has been used extensively for this purpose.

On November 6, the National People's Congress issued three draft laws for public comment. These are:

-- Tort Liability Law (Comment Draft)

-- Election Law Revision (Comment Draft)

-- Oil and Natural Gas Pipeline Protection Law (Comment Draft)

Copies of thse laws (in Chinese) can be found at the NPC website. I have also made convenient PDF versions of each law and if you want a copy of them, just leave a request (with your email address, which will be hidden from public view) in the comments section below. The NPC has installed a web based system for collecting public comments here.

These drafts are all quite significant. China has been struggling to adopt a tort code for over 10 years. The importance of the issue of elections in China is obvious to everyone. The issue of pipelines arises from China's ongoing shift from coal to oil and gas as a fuel source and the concomitant need for pipelines to transport the liquid fuels. Though I do not normally pay much attention to China's draft laws (because there are so many of them and because only a portion of them ever get enacted). However, these drafts deal with important issues (two of which are important to my firm's clients) so I be doing a short summary of each draft law in later posts.

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The U.S. has formally requested the WTO establish a dispute resolution panel concerning China's recent decisions to restrict exports of certain key raw materials. This follows on the initial request for review made by the U.S. in June of this year.

These US government actions highlight the importance of China in the trade of certain key materials. The materials referenced in the complaint are: bauxite, coke, fluorspar, magnesium, manganese, silicon metal, silicon carbide, yellow phosphorus, and zinc, all of which are key inputs for numerous downstream products in the steel, aluminum, and chemical sectors across the globe.

It seems certain this complaint will fail.

Every country has the sovereign right to determine how to deal with its own natural resources. Entry into the WTO does not require a country to export any of its natural resources. All the WTO requires is that all purchasers who belong to the WTO be treated equally. If China refuses or limits access to all countries of the world on an equal basis, the WTO should have nothing to say. In the same way, the U.S. can decide that our own coal and oil and natural gas are too important for our own industries and people and therefore cannot be exported.

This complaint highlights a major issue for world trade down the road. Modern industry relies on certain metals that are actually quite rare. If export of those metals is disrupted, it will cause severe dislocations in many high tech and other businesses. For China, the big issue is actually not the metals listed above. The big issue is rare earths. China is currently overwhelmingly the largest supplier of rare earths in the world, with well over 90% market share. Rare earths are essential to produce the magnets required for motors for electric cars and for certain components used in wind power turbine manufacture. China recently imposed restrictions on the export of rare earths. It is clearly China policy to gradually force all manufacturing using China rare earths to occur in China. Without the location of an alternative supply, China is in a position to dominate electric car production market for many years. This no doubt helps explain why Warren Buffet's Berkshire Hathaway chose to buy into BYD Company, a China based battery and electric car company. [Full Disclosure: Dan has been an investor in Berkshire Hathaway almost ever since Buffet-directed investments made his alma mater, Grinnell College, the "wealthiest liberal arts college" in the United States]

As part of a similar strategy, China is seeking to control the market for other key minerals by strategic purchases outside of China. Some of the target minerals are platinum, chromium and silica sand. Like it or not, China's approach seems much more likely to succeed than the filing of disputes with the WTO.

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By Steve Dickinson

Dan did a recent interview on joint ventures in China with Amcham and a couple of follow up posts, entitled, "Love The One You're With. When China Joint Ventures Make Sense," and "The China Joint Venture. It's BACK!!!"

We are writing about joint ventures so often these days because we are seeing a pronounced resurgence both in companies wanting to go into Chinese joint ventures and in companies coming to us needing legal assistance with their failed and failing joint ventures here in China. We have often expressed cautions about joint ventures in the past, and nothing we have seen recently causes us to change our mind.

In many cases we are not able to effectively assist the foreign party in a troubled JV because their original joint venture agreement has been so poorly drafted as to preclude any real assistance. We usually attribute this to the foreign company's originally misinformed view that "China has no law" or that the "JV contract is not worth the paper it is written on." Based on this view misguided view of Chinese law, the foreign joint venture participant failed to secure good legal representation when it went into the joint venture deal, leaving us with little or nothing to work with in terms of fixing the joint venture problems. The foreign joint venture participant has made basic mistakes that make it impossible to use the very effective Chinese laws and legal system to resolve the problems that have arisen in the JV. Though China's courts do generally enforce foreign arbitral awards, the issues between joint venture partners more often hinge on issues relating to control and operations, which typically require a Chinese court ruling.

Some examples of the basic mistakes are:

-- In order to resolve a joint venture dispute, the issue oftentimes must be resolved in China, either through litigation in the Chinese courts or through arbitration with CIETAC, BAC (Beijing Arbitration Commission), or some other legitimate Chinese arbitration body. Foreign partners often provide in the JV agreement, however, that litigation or arbitration must take place outside of China, either in the home country of the foreign partner or in some expensive and well known arbitration forum like Stockholm or London. This type of provision does little to nothing to protect the foreign partner and makes it impossible to resolve any disputes in China, where the problem exists.

To take an example, many clients come to us complaining that the JV's representative director has highjacked the operations of the China joint venture company and is operating without supervision and against the wishes of the board of directors. To effectively address this issue, it is imperative that we proceed in court in China directly against the rogue director. However, if the JV Agreement provides for jurisdiction outside of China, we are effectively precluded from taking such direct action.

This is only one way that foreign participants in JVs sabotage their own chances at resolving disputes. Other examples are:

-- Failing to hire their own independent legal and accounting advisor during the formation process, thereby relying on the Chinese JV partner for all of the formation legal work. This is a guaranteed disaster, and it still happens every day. We have seen US companies that have put tens of millions of dollars into a Chinese joint venture, using no legal counsel at all, using the legal counsel of their joint venture partner, or using a local Chinese lawyer who has no experience with foreign joint ventures and no real incentive to protect their foreign client. We had one client who when he first came to us boasted of the great job his Chinese lawyer had done for only $600. When we pointed out how his joint venture so heavily favored the other side that his multi-million investment would likely never yield him a penny, we began to suspect he no longer thought of his counsel as such a bargain.

-- Relying on a majority share interest to control the venture, rather than exercising effective control through the right to appoint the representative director and the general manager.

-- Relying on a personal guarantee from the Chinese JV partner as a substitute for failing to properly document the project.

-- Failing to provide clearly for protections for the foreign partner, assuming share ownership is sufficient to provide adequate protection.

-- Failing to carefully monitor capital contributions and the use of contributions to capital, assuming that accounting reports will be adequate to reveal the fate of money contributed.

Though the above looks like a long list, I often see joint ventures where the foreign participant has made every single one of these mistakes and more that I have not mentioned. When this happens, we as lawyers are severely constrained in terms of what we can do to help. But this is not because China has no law or because Chinese contracts are worth nothing. It is because the failure to properly form and manage the JV has made it impossible to proceed. This blame for this generally falls on the shoulders of the foreign JV partner, not on the Chinese side or the Chinese system.

Joint venture agreements are really no different from any other contract. The better the agreement, the less likely there will be problems and the more likely there will be a quick and inexpensive resolution to whatever problems arise.

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When I started this blog, I swore I would never do a post apologizing for not posting nor would I ever do a post making any sort of excuse for not posting. We are all busy and I hate excuses and unless one thinks this post violates that pledge, I am proud to say I have stuck by it.

In fact, instead of not posting when I get crazy busy, I just tend to get more biting and ornery so if any apology is necessary, I apologize in advance for that.

I also must dedicate this title to my Canadian international trade lawyer friend, Cyndee Todgham Cherniak, with whom I shared a podium at the just completed American Bar Association International Law Section Meeting in Miami. Cyndee commented to the crowd on how "shocking" my titles sometimes are and I thought of her when I penned this one.

My ire today stems from perfectly fine domestic US lawyers who, for some unknown reason, deem themselves able to practice international law. They are not. Last week, I got an email from an unnamed company that had doubts as to the legality of its arrangement with someone it described to me as their independent contractor in China. I then did what i always do when someone uses the US term, "independent contractor." I stopped him and told him that this person is an employee working without a written employment contract and his company is at risk for this.

The laws on this are clear in China. If an individual works for your company, that person is an employee of your company and that individual is covered by China's labor laws. This means the failure to have a proper written agreement and the failure to have a well-crafted employee manual might mean a large penalty for the company and/or an employee for life. If you want someone to work for your company without being your employee, you must contract for that person's work through a third party company. In other words, that person must be employed by some other company and your company must contract with that other company. See "Wanna Get Sued In China? Your Ex-Employees Can Help. Part II, The Corporate Counsel Edition."

But here's the really good part. This person then told me that his company has a written agreement with this person making very clear that this person is an independent contractor and not an employee and would this solve his company's problems. He then told me he had just sent me a copy of this contract and would I please look at it. I did and I wrote the following email in response (altered only slightly to hide any markers that might reveal the company involved):

My firm has a closer relationship with ____________ than just about any other firm and I have heard nothing but good things about Ms. __________'s abilities as a labor lawyer. Two of my best friends, ____________ and ___________ are lawyers there and we are always referring work back and forth. I say this to moderate that this agreement is not worth the paper on which it is printed. I’m sorry, but there is no other way to put it. There is absolutely no way this contract has any validity in China and suing this person in _________ [state] [as per the contract] will be a complete waste of time and money.

There is just no way that a contract calling a relationship one thing is going to make it that one thing. It would be like you and me signing a contract saying Seattle is in Oklahoma. We can do that, but it is not going to change the reality. Under Chinese law, this person is an employee and a US contract purporting to claim otherwise will never see the light of day in a Chinese courtroom, nor should it Chinese courts hire out their own translators so even if it did make it to court there (which it would not), it will likely say something very different than what is here in any event. This is why it almost always makes sense to have contracts in Chinese, not English.

The other problem with this document is that it calls for disputes to be resolved in _____ County Superior Court. My firm has dealt with this issue many times for both US and Chinese companies and I know exactly what will happen if you sue this person in _________county. You will win because she won’t show up. You will then take your judgment to China, where it has zero value whatsoever. Zero. Here’s a post I did on this a few years ago: Enforcing Foreign Judgments in China -- Let's Sue Twice. But it’s even worse than what I said and here’s why. This contract probably stops you from suing her in China because her defense there will be that you two agreed that any dispute would be handled in the United States and you already did that and won, so you cannot now sue her in China. We crafted that argument (with a Chinese law firm) on behalf of a Chinese company and they won on it.

At this point, however, I am more concerned about getting you legal than I am about your contract with this person. The real questions that need answering all revolve around what you are doing in China now and what you hope to be doing there a few years from now. It is the answers to those questions that will determine how you should proceed.

A year or so ago, I gave a talk to the Alaska Bar Association entitled What Lawyers MUST Know About China and I then did a blog post with the same name. In that post, I talked about how I should have subtitled the talk, "the biggest mistakes foreign lawyers make when dealing with China." I would love to give a somewhat more general talk on the eight (lucky number) things every domestic lawyer must know about international law, but right now I am having trouble getting past the first one, which is don't do it. Seriously, I think that would make a great topic for a talk and I would love to hear what items you think belong on the list.

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One of the misconceptions I am always fighting about China is that it has no laws. Even people who should know better are oftentimes guilty of just assuming there is nothing on the books to cover a particular business law matter. Their assumptions oftentimes stem from their having seen companies act in so many different ways, leading them to conclude there is no one right way.

There usually is and if you are a foreign company, your best bet is to follow the law.

If anything, one of the problems businesses face in China is too many laws, some of which are in conflict with others.

The Wall Street Journal just came out with a new site, entitled, China Real Time Report. It appears it will be free for the next couple of weeks and then require a subscription. Not clear to me if the subscription required will be to the newspaper itself (I think this is the case) or something separate. Anyway, it is billing itself as a "vital resource for an expanding global community trying to keep up with a country changing minute by minute," with its postings coming from "the wide network of Dow Jones reporters across Greater China."

Its post, by Sky Canaves, "Do Too Many Rules Erode the Rule of Law?" makes note of China's "too many rules" phenomenon and muses on the results:

It’s not a new revelation that China has a lot of rules.

Last year, there were rules for Beijing residents during the Olympics, and also rules for foreigners who came to town for the games (57 of them!)

This year, in Hubei province, a county government infamously ordered local officials to smoke locally produced cigarettes, while civil servants in the southwestern city of Kunming were ordered to learn 300 English sentences and 100 sentences in Lao, Burmese, Thai and Vietnamese, apparently to promote tourism in the region.

Today’s New York Times looks at some even more bizarre manifestations of rules run amok, such as an edict requiring schoolchildren to salute all passing vehicles on their way to and from school, and the Chongqing rule that “forced unmarried women to pass a chastity test before receiving compensation for farmland appropriated by the government.”

A potential side effect of so many seemingly arbitrary rules is that people may feel more inclined to skirt rules that they disagree with, or are simply too cumbersome to follow on a regular basis, fueling a culture of rule-bending and ignoring.

Not only does China have so many rules/laws, but they change faster (by about ten-fold) than any other country. I previously wrote on this in "China And Doing It By Heart. One Day You Are In And The Next Day You Are Out" and in "China's Internet Censoring. Hate To Say I Told You So, But I Told You So...."

I agree that having too many laws that people skirt leads to a denigration of the rule of law, but I fear the government likes things pretty much as they are. There is a Russian story I always tell that illustrates why I believe China likes so many laws. Many many years ago, an executive of a well known company called me for my views as to how it should handle going into Russia via Moscow. I called a Russian client of mine for the answer. This client is Russian and this client has been doing business with the very top echelons of the Russian government for about 30 years. He definitely told me that this US company needed to win over Moscow's mayor or something would go wrong. He told me he assumed the US company would not want to pay a bribe and he said Moscow's mayor is not going to be interested in that anyway. But, he said this company needed to do something very public to let Muscovites know that the mayor had been looking after the people in allowing this company to come in. My client suggested this American company donate a large sum to a local hospital or orphanage and publicize it with a big ceremony at which the mayor would be the honored guest. He said if this company did not do something like this, they would surely find themselves bogged down in some sort of lawsuit involving noise restrictions or something like that.

I passed all of this information on to the executive, who told me his company had never operated that way anywhere in the world. When I pointed out that his company had yet to go into any place like Russia, he poo-poohed me. My client was right and the American company was wrong. The American company ended up getting bogged down in a lawsuit that my client insisted would have been handled within weeks not years had this company done what my client had prescribed.

Which gets me back to my theory on too many laws. The more laws, the more likely one is to be in violation of one of them. And if everyone is in violation of a law, then everyone is beholden to the good graces of the government to avoid being fined or jailed.

I agree with this WSJ post that the Rule of Law is coming to China, but only ever so slowly.

What do you think?

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This is the follow-up post I promised to my last post on joint ventures, "The China Joint Venture. It's BACK!!!" I promised a follow up post because the first one received so many comments and a few of them raised issues I thought needed addressing.

That last post was really mostly a podcast I did with AmCham, which can be found here.

In particular, I wish to address when a joint venture with a Chinese company makes sense, and how best to structure it when it does. I will confine this post to when a joint venture makes sense and will write later in the week on how to structure them when it does.

I want to first go on record (again) as stating that my views on joint ventures have not changed one bit since I first started doing them around fifteen years ago. My experience is that they are always risky and that they should be thought through very carefully. I mention this only because some commenters seem to think that whereas I was once against joint ventures, I am all of a sudden in favor of them now because the economy has gone bad and American companies have no other choice. Wrong. My position has always been that it is my job as lawyer to explain the legal risks and the job of my client to figure out whether the potential rewards justify the risks. Now that more companies are unable to go into China without going in as part of a joint venture, the risk/reward equation has shifted to the extent that there is now more often no other, perhaps safer option.

Having said this, when exactly does it make sense to go into a China joint venture. The obvious answer is when the reward outweighs the risk and when a joint venture makes better sense than a Wholly Foreign Owned Entity (WFOE). But when is that most likely to be true?

Restricted Industries. It is going to be true in whatever industries the Chinese government prohibits foreign WFOEs yet permits joint ventures. These businesses are most commonly found in mining, fisheries, farming, energy, telecommunications, media, and finance. If the Chinese government prohibits foreign companies from conducting business in China as a WFOE, but allows it as a joint venture, the choice is clear.

Supply Chain Access. I hate to use a cliche, but it fits here. China is not one market. It is many and some parts of China are far more and far less developed than others. I suggest you read All Roads Lead to China's weekly China logistics wrap-ups blog to get a better feel for logistics in China. A few posts from that site ought to tell you that moving product within China can be very difficult. Add to that the fact that well established national retail distributors and chains are extremely rare and you can see how getting a product to market in China can be difficult and expensive. Being able to slide your company into an established supply chain on either a national or multi-regional or even regional level is one of the best reasons for joint venturing in China.

Ready to Go Factories. This is where I have seen the most change since the recession started. Whereas a few years ago our clients were mostly choosing to establish their own manufacturing facilities in China by way of a WFOE, they are now much more likely to opt for a joint venture so as to be able to take advantage of an already existing facility with workers ready to go. This is an area though where a WFOE would typically make better sense, but if a company is faced with the choice of having Chinese manufacturing via a joint venture or not having it at all, then certainly a joint venture must be considered.

We have worked on a number of these deals where the American company contributes its technological know-how (and some cash) and the Chinese company contributes its factory and its workers. On one level this makes sense, yet on another, this sorts of arrangements can be particularly risky because once the Chinese company has learned the technology and burned through the cash, the need for the American company may be over. Concomitant with our handling of these sorts of joint ventures increasing, our handling of these sorts of joint ventures having gone bad has also increased. These are the joint ventures that most require smart handling, which handling I will discuss in our next joint venture post.

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The World Trademark Review, in its article, "Research reveals increased US confidence in China’s rights enforcement regime," [subscription required for full article] just came out with a story on a recent US-China Business Council (USCBC) survey finding that US brand owners are becoming less concerned with IP rights enforcement in China. IP is now only number seven on a list of the "Top 10 issues," way down from first place in 2005.

China Law Blog's own Steve Dickinson is quoted on how trademarks are actually pretty well enforced in China these days:

Steve Dickinson, a partner at Harris & Moure, told WTR that, following entry into the World Trade Organization, China has “made remarkable progress in enforcement of trademark and patent rights”, but warned: “The same is not true of copyright, and this is where considerable problems still continue. The rate of copying has not really declined.”

However, Dickinson is unsure whether this [the proposed trademark law changes] will have an impact on confidence over the next year: “Most people are unaware of the amendments. Moreover, the changes are not really focused on enforcement and people who have been in China for some time have learned not to rely on changes in legislation. It is never clear when a law will be adopted or what the final version will say. Many proposed laws are changed dramatically in the final version, so we have to wait and see what is adopted.”

The article goes on to talk about how the proposed changes in China's trademark laws will only make things better.

For more on how IP protection in China is improving, check out "Piracy In China. T'Ain't No Big Thing."

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AmCham China just posted an interview here [mp3] of me regarding the return of joint ventures to China. Josh Gartner conducted the interview and he did a great job.

Though joint ventures obviously never left China, there has definitely been a post-recession resurgence. Whereas in the past, most American companies that did joint ventures in China did so for very specific and China-particular reasons, the "new" joint venture is being done as a cost savings devise. The old joint venture was done when the Chinese company had something the foreign company could not supply. That something was usually along the lines of a distribution network or necessary government contacts.

We are now seeing way more of what I call cost-saving joint ventures. By way of example, an American manufacturer might choose to joint venture with an existing Chinese factory, rather than spend the money to build a factory from scratch. The reasons for this upsurge are pretty obvious. American companies have less money now and, perhaps even more importantly, less access to credit.

If you are thinking of going into China as a joint venture, I recommend you give it a listen.

And If you want to read more on joint ventures, check out the following:

-- "China Joint Ventures. Find Me A Good One...."

-- "Avoiding Mistakes in Chinese Joint Ventures."

-- "China's Joint Venture Jeopardy"

What do you think?

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A reader sent me a link to a post from the very controversial blog, Atlas Shrugged. The post is entitled, "A Case of Perjury: Mohamed Bary's Vast Web of Lies." The gist of the story is that the Sri Lankan parents of a 17 year old Rifqa Bary are being denied the return of their daughter by a Florida judge because the family has been unable to document that they are in the United States legally. It appears the judge is denying the daughter's return both for immigration reasons and because her parents' credibility has been so damaged by their apparent history of immigration untruths.

The reader asked me if I am aware of anything like this having happened in China or the United States with Chinese businesspeople and whether "something like this" can impact one's business in China.

HECK YES it can.

I am aware of all kinds of instances where one's immigration status has harmed a business.

Many years ago, I was involved in an international litigation matter involving two Russian fishing companies. One of the key witnesses for the Russian company on the other side was a woman who had secured a US visa based on her extensive education and experience in the fishing industry in Russia. She had secured this visa by claiming a college degree from one of Russia's best fishing institutes and by claiming to have spent many years working for one of its largest fishing companies. Somehow or other, my firm's Russian paralegal extraordinaire had acquired a copy of this person's visa application and had noticed that her college degree from a college in Town A had been stamped by someone in Town B. My paralegal told me this was the equivalent of a Harvard degree with an official Yale stamp on it. In other words, it could never happen if the degree were not a fake.

Our next move was to depose this person and depose her we did. At her deposition, we asked her a whole series of questions intended to make clear we knew she had lied to get into the country. Among the questions we asked were the following:

1. Who was your favorite professor? She said she had no favorite. 2. Name one of your professors. She said she could not remember any. 3. Name one professor at the entire college. She said she could not remember any. 4. Who was your best friend at college. She said she was too busy studying to have had any friends. 5. Name one fellow student at your college. She said she could not remember. 6. List the classes you took. She gave some sort of vague answer. 7. Name some of the buildings on the campus. She could not remember any. 8. Describe the campus. She gave some incredibly vague description.

We asked the same sort of questions regarding the fishing company at which she had allegedly worked in Russia and we got the same sort of answers. It was fun.

And guess what, this key witness for the other side never showed up to testify at trial, which greatly strengthened our case and probably helped us prevail. I have no doubt her failure to appear stemmed from her fear of her illegal immigration status being exposed.

A few years later, I was contacted by a Russian-American company that wanted my firm to sue an American company over a debt. I pushed my client about skeletons in his and his company's closet and he admitted he was in the United States on a student visa and so should not have been working at all. We talked about how his bringing this case might expose him to visa issues and how he should think long and hard about bringing the case. He chose not to and I assume this meant he would be walking away from a not insubstantial debt.

We have had to tell a number of foreigners in China the same thing when they have sought our help in collecting on a debt in China or in suing their Chinese partner for having run off with what the foreigner thought was its own business. If you or your business are not legal in China, you have pretty much foreclosed your ability to sue anyone, no matter what they do to you.

A handful of times (usually during periods of stepped-up visa enforcement), my firm has been contacted by foreigners with illegal businesses in China who have either been denied re-entry into China or have been told to leave. These people are desperately seeking our help to get them back into China. They are desperate because their profitable China based businesses cannot function without them. The odds of our being able to help them are slim.

One of the most underrated benefits of having a Wholly Foreign Owned Entity (WFOE) in China is that entity's ability to hire foreigners and those foreigners' ability to secure Chinese work visas (Z visas). These companies are legal and they have standing to sue and since their employees are working in China legally on Z visas, they have nothing to fear by testifying on the company's behalf.

One of my favorite stories is when I went to Papua New Guinea to help a Sakhalin Island client secure the return of two helicopters. When I landed in Port Moresby, I was asked if I was in the country as a tourist or for business. The tourist visa was something around $35 and the business visa was something around $350, but I said "business'' and I paid the much higher fee. I then flew to Goroka where I met the next day with the governor of the Eastern Highlands Province, Malcolm "Kela" Smith. I was told "Kela" means bald man. The first thing Mr. Smith did when I met with him was to check my passport. When it revealed I was there on a business visa, I could sense a change in his view of me. Though he never confirmed this to me, I am convinced that had my passport revealed I was in PNG on a tourist visa, Mr. Smith would either have had me thrown out of the country or he would have refused to meet with me because I was in the country illegally. Kela Smith ended up meeting with me and with my client and within a day or two we had a deal whereby my client would get his helicopters back.

The bottom line is that if you are going to be doing business in a foreign country, particularly China, it pays to do so legally and it pays to have the right visa.

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Businesses are secretive. Some more so than others. My firm has a long history of representing companies in the international fishing business. Most fishing companies are laughably secretive. I say laughably, because they try to keep things secret that the whole world already knows about. Just the other day, a Russian fishing client of ours was in our office revealing the secret of how his company had recently switched to using so and so as its new agent in Pusan, Korea. I promised secrecy, but I then pointed out that two people had already called me to ask me why the switch had been made. Another time, a US based company told me it now had a couple of vessels in the Russian fishery, but that I should be sure not to let anyone know. I went to my office and printed out a couple of internet articles saying the same thing.

I mention all this because the fear of piracy in China is similar. Everyone is afraid of piracy in China, but really only a small percentage of companies need worry much. Yes it exists, of course, but how much impact does it really have on your business?

With very few exceptions, my firm's China clients have either not been hit with piracy in China or they are too focused on making money from their own products to worry about it much. I do not mean to minimize the problem in China because it is most certainly there, but it is not nearly as much of an impediment to profits as believed. I am writing about piracy today because Shaun Rein just came out with an excellent Forbes article on the subject and I know from our own discussions that our views on it generally coincide. The article is entitled,"How To Deal With Piracy In China" and its subtitle is "It needn't be an insurmountable problem for your business."

Shaun is right.

The article starts out talking about how piracy is an issue of wealth, not morality. I agree. Shaun sees piracy in china declining as china's consumers get wealthier. I agree.

Shaun then calls on how companies selling their software and DVDs in China need to change their sales and pricing strategies. I sorta agree. I say sorta because my firm represents a number of gaming and educational software companies and rather than selling their products on disks, their methods (which have worked pretty well for the most part) have been to sell the product in digital format online with all sorts of security measures. Can these security measures be hacked? I am sure they can. Are these companies making good money nonetheless? I think they are. I know that sometimes companies are very reluctant to lower their prices in one country (let's say China) for fear of angering their customers in other countries. That is certainly a valid consideration and one that every company needs to weigh.

Shaun then talks about how the "the piracy situation has gotten markedly better in the past three years" in the luxury goods arena and how by "the end of next year, China will overtake the U.S. as the second-largest market, after Japan, for genuine luxury products."

Shaun then discusses the results from his company's comprehensive China consumer survey regarding luxury goods:

The vast majority of them told us they would buy nothing but genuine luxury products if they could afford to. Most said they already buy what real items they can and then match them with fake ones.

A 24-year-old secretary in Shanghai said, "Right now I can't afford to buy all real Gucci, so I save to buy a real Gucci bag and match it with fake shoes. But I'm not fooling anyone with the fake stuff. My friends can tell. As soon as I have enough money, I'll buy only real products."

Consumers value the real thing when it comes to luxury items, unlike with DVDs and software. Fakes don't bring them the status they aspire to. Therefore luxury goods companies shouldn't waste time and money suing or raiding vendors of fake goods. They should build flagship stores, penetrate third- and fourth-tier markets and launch marketing campaigns that truly connect with the Chinese to create brand loyalty.

Way back in January, 2006, in a post entitled, "Faked in China -- Protection is Possible," I had this to say about counterfeit consumer goods in China:

Like everywhere else, those in China who can afford the real thing, prefer to buy the real thing. As Chinese wealth increases, and as more and more Chinese companies seek to protect their own brands, counterfeiting will decrease. This is what happened in both Japan and Korea, both of which were at one time, notorious for counterfeiting.

At this point, I do not believe the increased sale of luxury goods in China has anything to do with a decrease in sales of counterfeit "luxury" goods in China. In fact, I would expect sales on both fronts to rise in tandem for quite some time. But, the increase in luxury goods sales does prove out what both Shaun and I have been saying for a long time and that is that though China does have piracy, that has never stopped most good companies from doing just fine.

UPDATE: I just read a comment from someone who says this post is overly simplistic for ignoring the harm counterfeit products, such as medicines and food, cause China's consumers. Though I would not use the word simplistic, I would wholeheartedly agree with the thrust of the comment. This post completely ignores the impact on consumers; it is written strictly from the perspective of harm to foreign businesses. It was written this way not to in any way minimize the huge problem this comment raises, but simply because I wanted to bite off only this small part of the apple.

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Got an interesting email the other day regarding the language to use on a contract. It went as follows:

I was talking to someone who was bragging about how great their employment contract was yesterday, and he said "My contract is in both Chinese and English, and it says that in the case of a difference in the translation, the English language version takes precedence."

Am I the only person who sees the potential abuses of this, when given to someone who cannot read Chinese? If the Chinese language version says the opposite, he's screwed, right?

If you choose to answer this question, please answer it on your blog. I'm sure everyone considering employment in China would like to know the answer.

The answer is yes, if the Chinese language version says the opposite of the English "he's screwed." And here is why. And this holds true for all agreements, not just employment contracts.

In China, Chinese language contracts take precedence over any other language, unless the Chinese language contract states that some other language controls. So if a contract is in both Chinese and English and the Chinese version says the Chinese language controls and the English language version says English controls, the Chinese language version will control. Even if the Chinese language version is silent as to which version controls, I am pretty certain the Chinese language version will actually control.

Years ago, my firm was representing Russian company that had an agreement with a dishonest American company (guess what people, it is not always the "foreigners" who pull this stuff). The English language version said that the English language version would control and the Russian language version said that the English and Russian versions had "equal weight." On one critical issue, the English language version said one thing and the Russian language version said either the same thing or something else, all depending on how one interpreted the Russian version. We argued that the Russian version said "something else" and the American company argued that, no, the Russian version, "of course" said exactly the same thing as the American version. We settled before a ruling, but I was not optimistic that our interpretation would carry the day even though we had an email from the American company that helped our argument.

I have written on this before but it bears repeating. If you are going to have your contract in multiple languages, make sure you know for certain which language is going to control. This means making sure you know exactly what all of your contracts say, whatever the language. Having two languages with equal weight is pretty much always the worst "solution" of all because all that does is increase the room for interpretation and delay it until there is a dispute. It is far cheaper and more sensible to get the meaning clear before signing a contract than to pay your lawyers to fight about it later.

For more on the language of your China contract, check out "China OEM Agreements. Why Ours Are In Chinese. Flat Out."

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My firm is constantly getting asked about what it takes to set up a branch office in another city in China. In other words, you already have your WFOE in place in, let's say, Shanghai, and you decide you want to open another office in Qingdao. Or it could be the reverse. What do you do and how easy is it to do it?

I thought of this today because a client wrote me on this and I figured I might as well put my response up here for everyone, so here goes:

Setting up a branch office is really pretty easy. You apply to the local office that handles business licenses and the like. The process for a WFOE seeking to open a branch office is pretty much the same as it is for a Chinese company seeking to open a branch office.

It usually takes only a month or so to complete but can go a bit faster if you want to pay for someone in the particular city to try to speed it up for you.

The exact details vary from city to city, but in general they are going to want to make sure that you have a proper physical office in both cities, that you have a local bank account, and that you are set up to pay local taxes.

That's it.

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Before my law firm hires anyone, we make sure they do not have a problem with swearing. Because I do. I know I shouldn't, but darn, certain swear words are absolutely critical for communication. But when I started this blog, I swore (pun intended) I would strive never to write anything I would not want my kids to see. This meant not swearing. Now that my youngest recently turned twelve, I am constantly tempted to really let loose and I have never been more tempted than today. But I have chosen to abstain and use weird quasi-British language in the post title instead.

My temptation stems from my anger at always having to deal with (or clean up from) the messes created due to a strange belief that if someone is Chinese, no matter what their education, training, and/or experience, that person must be expert on both Chinese and international law. Let me explain.

I have had it with US companies believing their Chinese-American Vice-President (or whatever) is somehow qualified to practice International law. Let me back up.

Many of our clients that do business in China have someone in their company driving their China business. This person is typically a Chinese-American who has been living in the United States for ten or more years. This person is oftentimes an engineer or some other technical person. This person typically is good at his or her job and has risen to a trusted position. This person is usually trusted by the company and the trust is usually justified.

In spite of this Chinese person's lack of ANY legal training or business training, this person is typically chosen to be the lead person to start up operations in China. The company is of the view that because this person grew up in China (even though this person probably has never done any real business there and has not been back but for a vacation or two in the last ten years) this person must know everything about the legal and business aspects of starting and running a company in China.

Everything.

Now step back, if you would, and think about the absurdity of that. Please.

Now once this Chinese person is put in total charge of bringing his or her company into China, what is this person to do? Can he or she tell the owner "hey, wait a minute, I left China at 15 years old, and I am an engineer, not a marketer and not a lawyer?" He or she could, but is this going to happen? Of course not. This person instead is delighted to have been essentially handed an entire country to run and this person is going to run with it. So this person acts like starting and running a foreign company in China is a piece of cake.

Now I would not have a problem if these companies simply went with their Chinese "experts" and did not call us until they want us to scrape them off the floor. We have gotten a million such calls from companies that have gone into China with just their Chinese VP giving the legal advice and our response to their problems is nearly always the same: "Your chances are not good, but for a lot of money we can try. Oh, and the next time you go into a foreign country, you might want to consider hiring someone who actually knows what the f--- they are doing." Okay, so I've never really said that, but darn, I have really wanted to.

But now that Americans are getting "smarter" and word has gotten out on how badly other American companies have fared by going into China the wrong way, they are starting to call us before it is so late that all I can tell them is how badly they have done things. And one would think that would be good, right? Well, not always.

For you see, some of these companies want us to "oversee" their trusted Chinese VP and that is where the problems lie. We have had a number of these in the last year and they tend to be really bad news. I am going to explain some of these, but be vague enough, and mix the facts enough so that there is no way anyone can identify themselves. In other words, these stories are all based on facts, but any resemblance to anyone living or dead is purely coincidental. The bottom line on all of these is that the American company (and in one case British company) start out all worried about how my law firm's involvement might be seen as "stepping on the toes" of their Chinese VP.

1. Science related company contacts us about going into China. Owner brags about his Chinese VP. Chinese VP has PhD from top US university, in some sort of science. Chinese VP has been with company for 20 years. I later learn Chinese VP speaks Cantonese, not Mandarin. Chinese VP has a great government contact that will set this company up in a top tier science park at a terrific deal. Company wants to hire my law firm to "make sure" everything is being done correctly from the legal side. I quote our flat fee price for forming/registering a China WFOE (Wholly Foreign Owned Entity) and the owner then asks me if we can lower it because his Chinese VP will be doing "nearly all" of the work. I tell him that his company can pay us by the hour and that way we will only be charging for what we do and the more his Chinese VP can do, the less we charge. The owner is delighted. He tells me he is not so much concerned with the money, he just does not want to appear to look as though he does not trust his VP.

So we start working with this Chinese VP and within about 2 minutes, it becomes apparent to us that this guy knows zero about forming a China WFOE. Zero. We end up spending around six hours just explaining the basics to him and we bill only three hours for this.

This VP then comes back to us with a lease agreement that is both totally bizarre and absolutely unacceptable for a WFOE. There are certain requirements for WFOE leases and these requirements can vary from city to city. We spend massive time explaining to this guy why this particular lease will not work and what needs to be done to get one that will. We end up pretty much having to write a full lease in Chinese by way of explanation.

And we again write off about half our time on this. And so it goes.

We send our bill to the client and guess what, his Chinese VP complains about the time we spent on it. Of course he does, because if his boss knew how long we spent trying to get the Chinese VP up to speed, the Chinese VP's role in China would be jeopardized.

How did I handle this? I told the client that what we were doing was not working and that if we continued to work with his Chinese VP on an hourly basis in forming the WFOE, we would probably end up charging FIVE times our normal flat fee rate for WFOE formation. I told him we could either do the WFOE at our normal flat fee, with credit for all time already billed, or he just tell us what he thought to be the fair amount for what we had already billed and we go our separate ways.

2. Technology related company contacts us with a tax question regarding its Joint Venture (JV). The company tells me what it is planning to do and I tell them their plan will not work. The company is planning to gain a 50% interest in a Joint Venture by contributing nothing to the joint venture besides some Intellectual Property (IP). I tell this company Chinese law requires the foreign company in a joint venture to contribute at least 80% in cash for joint venture ownership. I tell this company that I have seen these situations before (with increasing frequency, actually) and it will not end well for him. The Chinese company gets the Western company's technology with the Western company believing it is getting ownership in the Joint Venture company, when in reality it is not. But this guy insisted his deal was good because his Chinese VP had told him it was good and because the local government had approved it. I told him that we would not represent him on a deal we knew would fail.

3. Joint Venture Number 2. British company comes to us a few years ago with Joint Venture papers that purport to give it exclusive distribution rights for the joint venture's product outside China. The British company's Chinese VP has already signed off on the deal but the company wants a lawyer to look at it before they actually sign, but just to confirm everything is okay. We look at the papers (in Chinese) and notice that the exclusive distribution rights are coming from the Chinese joint venture partner company, not from the joint venture itself. We explain why this will pose problems for our client why we do not think it was an innocent mistake. The Chinese VP is furious with us and tells the company we do not know what we are doing. Fortunately, the British company understood exactly what was happening and it ended up walking away from this Chinese company. This British company ended up going into China on its own and it has thrived.

I once talked about this Chinese VP phenomenon with a couple of Chinese lawyer friends of mine and they told me that Chinese companies love doing business with Chinese VPs because they know the Chinese VP is in an impossible situation. They said that the Chinese companies build up the confidence of the VP by praising his knowledge of China and by welcoming him or her into the club of people who "really know how business is done in China." The Chinese company then flips around and takes advantage of the VP's unwillingness to lose face by admitting he or she needs help. I am of the view that these Chinese VPs are seldom on the take; rather, they are the ones being taken.

What are you seeing out there?

UPDTATE: Someone has complained very vociferously about this post, claiming I have unfairly generalized. I disagree, but nonetheless want to make clear that I am absolutely not saying that no Chinese Vice President knows Chinese law. What I am saying is that Chinese law for foreign companies is very particularized and the only people I know who truly understand those laws and all of their nuances are the lawyers who deal with them every day.

The same is generally true with respect to the United States as well and I wrote a post on this a few months ago, entitled, "Registering Your Trademark In The US And China On The Cheap." In that post, I talked about the problems I was seeing with companies' failing to hire proper trademark counsel for their US trademark filings and how those failures were impacting their China business.

The bottom line here is that the smart way to go is to retain the right person for the job and the right person to do legal work is an attorney. I have many non-lawyer clients who are very knowledgeable about law, but they would not hesitate to admit their legal knowledge does not usually rise to that of an attorney. And I would think they would also recognize that having grown up in a country does not make one an expert in that country's laws, particularly those laws that relate to foreign business.

Was I off base here?

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I want my MTV.

I will be speaking at a Chinese drywall seminar in New Orleans next month and that means I am on an email list that I think consists of others who will also be speaking at this seminar. Seeing as how this email list consists of around 100 people, I do not believe I am violating any expectations of confidentiality by publishing what transpired on it today.

I get an email from Gary Rosen, who has a PhD in biochemistry, proclaiming the "Chinese manufacturers are NOT the ones to blame for problem drywall." According to Rosen, there is"good quality drywall manufactured in China at International Organization for Standardization (ISO) qualified factories that have US recognized quality control approvals such as UL and ASTM" and this stuff is, "by definition, NOT problematic." But China also makes drywall for local consumption that is not made at ISO qualified factories and is does not have UL and ASTM approval. According to Rosen, it was this drywall that was imported in the US and it is this drywall that is causing the problems.

Rosen goes on to lay blame right at the feet of the US companies that brought the bad drywall into the United States:

The problem is that US distributors purchased and then imported the domestic quality Chinese drywall rather than much better quality drywall made for the export market. If US distributors would have all purchased the good export stuff there would not be any problems at all.

So why blame the Chinese? They certainly have the right to made lower quality less expensive product for their local consumption. Investigative reporters should be focusing on why US drywall distributors chose to purchase the lower quality Chinese domestic product rather than purchase export quality product. The answer will certainly turn out to be – they saved money by buying junk Chinese domestic board. Investigative reporters should be focusing on why builders actually used this nasty smelly stuff rather than rejecting it.

Rosen then attacks US builders' quality control systems:

What about the US builder’s quality control systems? Surely products used in the construction of homes have to be evaluated prior to use when not purchased from a well known US manufacturer and not approved/ certified by well known quality control bodies like UL, ISO, and ASTM? Again, where were our quality control systems?

Rosen was actually responding to a Miami Herald, quoting a number of US lawyers on the difficulties in suing Chinese companies for drywall problems. Seems these American lawyers are getting pretty testy.

The article talks about the 300 drywall lawsuits currently pending in New Orleans Federal Court and asks "who's going to be on the hook for any damages courts might award?" The article then outlines some of the tactics the plaintiffs' lawyers are considering for trying to collect and guess what? None make any sense.

The lawyers are "considering" suing "U.S. investment bankers who financed the Chinese companies, and seizing ships that brought the drywall to the United States." With all due respect, the odds of either of these tactics generating any cash are pretty much zero. First off, it would surprise me if any of the Chinese drywall manufacturers were financed by "US investment bankers." Does anyone disagree with me on this? Second, I also doubt very much that any US court is going to set aside 200 years of US (and a couple more hundred years of British) jurisprudence and find the investors liable. I certainly hope not as I own shares in drug and tobacco companies and by this logic, I could be held liable for injuries caused by those companies.

The arresting ships idea is probably even more ludicrous. What these lawyers are proposing is to do something that has, as far as I know, never been done anywhere in the world or at any time in the long history of shipping, and that is to find the shipper liable for having shipped a perfectly legal product. Not only has this never been done, but if it were done, it would probably destroy the shipping industry as we know it and, at minimum, raise the price of pretty much every single product worldwide. Can you even imagine a system where shipping companies are forced to guarantee the quality of every single item they ship? I can't and if any of my law firm's shipping companies get their vessels arrested over this, you can bet we will be counterclaiming for wrongful arrest.

And it is not just plaintiffs' lawyers who are getting mad. U.S. District Judge Eldon Fallon found one Chinese company, Taishan Gypsum Co., in contempt of court for ignoring the suits. And though I am on record in this post ("China Tooling/China Consulting -- I Told You So") for stressing the importance of abiding by Federal Court orders, I do not for a minute believe the Taishan Gypsum is going to care one whit about what some U.S. judge has to say. If Taishan Gypsum conducts no business in the United States or in any of the very few countries that typically enforce U.S. money judgments (I very much doubt any country enforces U.S. contempt orders) U.S. court orders almost certainly mean little to nothing to it. Most US judgments against Chinese companies have no value beyond the Chinese company owner's belief that it will preclude his/her son or daughter from attending UCLA.

The article then states how US lawyers "said Chinese companies are virtually insulated against liability in U.S. suits because suing them through international court is costly and time-consuming and civil judgments in U.S. courts are not enforced in China." I agree with the part about US court judgments not being enforced in China, but I do not know what they mean by an "international court." International courts are not going to take a drywall case so I am going to assume that Chinese courts was meant here. Again, these lawyers are wrong. Suing in Chinese courts is way cheaper and way faster than suing in US courts. The problem with suing in a Chinese court in a case like this is not the time or the cost, it is the damages. Chinese courts are incredibly stingy (by US standards) with damages for pain and suffering and lost profits. A win in a Chinese court might mean no more than a full refund for the cost of the drywall.

But at least one lawyer believes the future for plaintiffs' lawyers in these drywall cases looks bright because....well....because he really really wants it to:

Herman said plaintiffs' lawyers were up to the challenge. "I think we can bust the dam in this case," he said. "You're talking about billions of dollars" at stake, Herman said. "We're going to find some ways to make them responsive."

The next email came from Ervin Gonzalez, a plaintiff's lawyer out of Miami, who has this to say:

The Chinese are to blame because they sold defective dry wall, damaged thousands of homes, hurt consumers and caused billions of dollars in damages to be sustained by American homeowners and businesses. The Chinese Companies do business in the United States and should be responsible for the damage they have caused to American home owners and businesses. If the Chinese Companies are not willing to be accountable and responsible for their acts and omissions they should not do business in the United States. If any American Company provides a defective product, that Company would be responsible and accountable in a court of law in the United States as well as in the Country where the defective product was sold. Your comments blaming only the American companies, who certainly are legally responsible for this dry wall debacle, ignore the basic principles of justice, equity, accountability and responsibility that our civil justice system is built on. While I have enjoyed reading your scientific reports, I must say that your editorial supporting the Chinese makers of defective dry wall lacks any basis in law, equity, fairness and common sense.

I was interviewed yesterday by the Center on the Global Legal Profession and was asked what has surprised me in my practice of international law. Among my answers was how how so many American lawyers still refuse to recognize that foreign country's laws tend to be very different from ours and that U.S. law does not cover the entire world. As much as we U.S. lawyers (myself included) wish it would, it just doesn't and it never will.

So what of the Chinese drywall? Who is responsible and who should be liable and who will be found liable and who will need to pay? I have no idea who is responsible and I said that in my email to the group:

As someone who devotes the bulk of his law practice to China (representing mostly Western companies, but a few Chinese companies as well), I find this whole discussion bizarre and a little bit scary. There are good Chinese manufacturers and there are bad Chinese manufacturers. There are Chinese manufacturers that manufacture to spec and there are Chinese manufacturers that do not manufacture to spec. And there are American companies that get bad product from China because they do not know how to get good product from China or because they simply do not care whether they get good products or not. And there are American companies that get bad product from China even though they did pretty much everything one can do to prevent getting bad product.

Unless one has had really close involvement with what transpired between the Western companies and the Chinese companies involved in the drywall mess, I do not see how one can confidently assess blame either way between the Chinese and the Western companies. I am not speaking to legal responsibility here, I am talking about blame. My experience in these situations is that most of the time, there is plenty of blame to go around.

Who should be liable? Whomever is responsible.

Who will be found liable in the US courts? Whomever is responsible.

Who will need to pay? See above.

For more on these issues, check out the following:

-- Who Needs International/Foreign Law? Not Us, We're Americans

-- Suing Chinese Drywall Manufacturers. Why All The Bother?

-- Will Your US Judgment Be Enforced Abroad? Not China, But Maybe.

-- Enforcing Foreign Judgments in China -- Let's Sue Twice

-- Taking Judgments To China (And Korea), Let's Not Sue Twice

-- Chinese Drywall. If You Think That Is Bad.....Just Wait

-- China Law. What's Insurance Got To Do With It?

-- Chinese Drywall Cases. Show Me The Money!

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Won't Get Fooled Again.

My roommate my senior year in college was a Who fanatic. And when I say fanatic, I mean fanatic. This guy had lived a few years in London and he had the urban trench coat and the British accent down pat. Most annoyingly, the only beer he would buy was Guiness, which he would not even refrigerate. He did this knowing full well that neither I nor our other roommate would ever touch the stuff. He had about 1000 Who albums, and before you tell me that the Who never made 1000 albums, let me tell you that about 990 of those were bootlegs or "European editions," or whatever. He had the Who doing just about every song you can think of. Seriously.

Sorry for the rambling, but I thought of the Who today when a reader sent me a China Daily article, entitled, "HK attracts record investment in 2008," and asked how much of this might be due to an increase in companies investing in China through Hong Kong. I do not know, but I am sure some of it is.

Ten years ago, if you were going to go into China, you went via Hong Kong. I have no percentages on this, but I am guessing that about 90 percent of United States businesses that formed companies in China did so by first forming a Hong Kong company and then using that company to form their China entity. The other ten percent was made up mostly of British Virgin Island (BVI) companies.

Then, maybe around five years ago, the reasons for forming a Hong Kong company to go into China started to disappear. It had become relatively easy to form a Wholly Foreign Owned Entity (WFOE) in China with a US company as parent and the tax benefits of having a company in Hong Kong were not so great because China's corporate taxation of WFOEs had become so low. I would guess that I had to convince about half of our clients NOT to spend the extra time and money to form a Hong Kong company just to go into China. For most of my firm's SME clients, Hong Kong was just added administrative and legal expenses.

But now, when clients talk about forming a Hong Kong company first, I listen. And whereas during the last 3-5 years only around 10-20 percent of our clients formed a Hong Kong company first, in the last six months or so, it has probably been more like half. China's corporate tax rate (commonly referred to as its Corporate Income Tax or CIT) is generally 25, but can be reduced to 15% for qualified enterprises engaged in industries encouraged by the China government (such as high tech companies). Forming a Hong Kong company can, in some instances make sense from a tax perspective.

On top of this, China has now made it marginally easier for Hong Kong companies to register a China WFOE than, say, a U.S. company seeking to register a WFOE directly. I have absolutely no reason to believe that the likelihood of getting approval for a China WFOE will be any higher by going through Hong Kong, but I do know that a few requirements (such as consularization of certain required documents) have been eased for Hong Kong entities.

Hong Kong is now an issue that needs to be addressed by any foreign company looking to do a China company formation.

What are you seeing out there?

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I am becoming obsessed with the Foreign Corrupt Practices Act (FCPA) because I see it as one of the the "most missed" things for United States companies doing business in or with China.

The other day, I was interviewed by a news service reporter who asked me whether the FCPA is a big issue for my firm's clients. She was calling me to discuss a post I did earlier this year about a client who chose to walk away from a China deal out of fear of violating the FCPA. She asked me if this was common and whether my firm's clients are concerned about the FCPA.

I told her this was actually the first time in years a client had even raised an FCPA issue with me and that clients never even broach the subject with us when going into China. I told her I am the only one who ever brings it up and when I do, clients are generally not terribly interested. I see this as a huge mistake, particularly since the US Department of Justice has made clear it intends to increase its pursuit of FCPA claims and particularly since China is one of the more difficult countries in which to operate.

Most importantly, a little effort towards compliance can go a long way.

It was in that spirit that I asked Mike Koehler of the FCPA Professor Blog to guest write an FCPA post aimed at those who do business in China. Mike is an Assistant Professor of Business Law at Butler University and before that he gained a decade of legal practice experience at an international law firm during which he conducted FCPA investigations around the world, negotiated resolutions to FCPA enforcement actions with government enforcement agencies, and advised clients on FCPA compliance and risk assessment.

Bottom Line: Mike knows whereof he speaks on the FCPA and here is his post.

In many respects, ensuring FCPA compliance in China business operations is no different than ensuring FCPA compliance in other countries.  Basic FCPA benchmarks (such as having a clearly articulated corporate policy against FCPA violations; training employees, agents and business partners on the company’s FCPA compliance code, standards, and procedures; and having FCPA specific due diligence requirements for retention and oversight of agents and business partners) will serve a company well no matter where it does business, not just in China.
 
This post, however, is not about what makes FCPA compliance in China similar to other countries, but about "what makes China unique" from an FCPA compliance standpoint.  In this post, I share some of my thoughts and experiences from conducting several FCPA internal investigations in China and based on a read of the many recent FCPA enforcement actions involving China business conduct (with little substantive FCPA case law, these enforcement actions are commonly viewed as de facto case law).
 
The key to understanding China FCPA risk, and thus the key to ensuring FCPA compliance in China business operations, is two-fold.

First, is to realize that despite certain market-based changes China has many state-owned or state-controlled enterprises (so called "SOEs"). 

Second, is to understand that the Department of Justice and the Securities and Exchange Commission (the two “Enforcement Agencies” with FCPA enforcement authority) view employees of these SOEs (regardless of rank, title, position or how these employees are classified under Chinese law) as being "foreign officials" under the FCPA’s anti-bribery provisions on the theory that SOEs are "instrumentalities" of the Chinese government.  (See here for the statutory definition of "foreign official”).
 
Many of the recent FCPA enforcement actions concerning business conduct in China involve "foreign officials" under this interpretation.  In other words, the "foreign official" recipient of the alleged improper payments in these enforcement actions are not core government officials or employees of government offices, but rather employees of alleged SOEs.

For instance, in the August 2009 Oscar Meza (former Director of Asia-Pacific Sales for Faro Technologies, Inc.) enforcement action, the SEC civil complaint charging FCPA anti-bribery violations refers to “employees of Chinese state-owned companies.” (See here).

Likewise, in the July 2009 Control Components, Inc. enforcement action, the DOJ criminal information contains a list of specific Chinese “state-owned customers” along with a conclusory statement that “[t]he officers and employees of these entities, including but not limited to the Vice-Presidents, Engineering Managers, General Managers, Procurement Managers, and Purchasing Officers, were ‘foreign officials’ within the meaning of the FCPA…” (See here. See also the April 2009 indictment of several company employees based on the same theory here.

I have pointed out elsewhere (see here) that the Enforcement Agencies’ interpretation of the “foreign official” – to include employees of SOEs – is an untested and unchallenged legal interpretation.

Not surprisingly, this interpretation comes as a shock to Chinese national employees of U.S. companies (as well as the U.S. business leaders of such companies), and who can blame such shock and confusion. The Enforcement Agencies’ interpretation of the “foreign official” to include employees of SOEs is the functional equivalent of someone telling you tomorrow that your neighbor who works for General Motors or the guy you play softball with on Thursday nights who works for AIG are both U.S. “officials” based solely on the fact that these individuals work for companies owned or operated by the U.S. government.

It is beyond the scope of this post to debate this interpretation because the fact of the matter is, until this untested legal theory is challenged, it is the Enforcement Agencies’ interpretation and companies doing business or seeking business in China are “playing with fire” if they calibrate corporate FCPA policies and procedures to anything other than the Enforcement Agencies’ interpretation.

Calibrating FCPA policies and procedures to this “foreign official” interpretation means that it is imperative for a company operating in China to know its customers and to understand whether its customers (or prospective customers) are owned or controlled by the Chinese government.

How does one do this? Admittedly it is a difficult task, made even more difficult by the fact that the various DOJ/SEC charging documents merely contain conclusory language to the effect that “Company X” is state-owned or state-controlled without discussing the facts or factors supporting the conclusion.

Yet understanding a company’s China customer base is an essential task to ensuring FCPA compliance in China. Here are a few practical suggestions to determine if your customers or prospective customers in China are SOEs: (i) if the relationship permits, ask the main contact at the customer whether the government owns an interest in or controls the company; (ii) obtain a copy of the company’s annual report or try to determine if government officials serve on the board of directors of the company or in a management role; (iii) visit the company’s website or conduct general internet searches to see if there are any connections between the government and the company.

Chinese SOEs can be found in any industry, but are most commonly found in the following industries: oil and gas, other resource extraction, healthcare, transportation, and utilities. Finally, a word of caution. Just because a company may have shares traded on a public stock exchange (whether in China or elsewhere) does not mean that the company is not an SOE. Many Chinese SOEs have publicly traded shares.

Here is why understanding the Enforcement Agencies’ interpretation of the “foreign official” element is essential to ensuring FCPA compliance in China.

In my opinion, most companies do not intend to “bribe” a “foreign official” (regardless of the interpretation) and, in fact, find such behavior repugnant. However, most companies actively market its goods and services, “wine and dine” customers or prospective customers, and host golf outings or other entertainment – all in an effort to maintain “good will” with customers and increase sales.

While doing such things with purely private customers in China is viewed as effective marketing, doing the SAME things with SOE customers in China may be inviting FCPA scrutiny. Given the gift-giving, hospitality culture in China, this is no trivial matter.

For this reason, any company doing business or seeking business in China is wise to maintain a roster of its SOE customers and to implement internal controls with the involvement of finance personnel to ensure that increased oversight and review is triggered every time company expenses involve SOEs. Because of time zone and language differences, oversight of such expenses is no easy task, but it is a task companies must commit to undertake.

Training all company personnel in China (not just high-ranking personnel) on the Enforcement Agencies’ creative “foreign official” interpretation is also essential as demonstrated by the 2007 enforcement action against Lucent Technologies.

In its complaint, the SEC alleged as follows: “Lucent [FCPA books and records and internal control] violations occurred because Lucent failed, for years, to properly train its officers and employees to understand and appreciate the nature and status of its customers in the context of the FCPA. Many of Lucent’s Chinese customers were state-owned or state-controlled companies that constituted instrumentalities of the government of China and whose employees, consequently, were foreign officials under the FCPA.” (See here, complaint at para 3).

This paragraph from the Lucent SEC complaint is likely to induce a cold-sweat in most business leaders who may be reminded of their company’s own FCPA compliance deficiencies.

The take-away point from an FCPA compliance standpoint is that conducting business or seeking new business in China is different because of the Enforcement Agencies’ “foreign official” interpretation. This interpretation certainly increases the due diligence and compliance costs of doing business in China, but companies are wise not to ignore this interpretation and its practical effects so long as the Enforcement Agencies’ interpretation remains the “law of the land.”

UPDATE: Stan Abrams over at China Hearsay has done an excellent post on this post, entitled, "FCPA and China - Why Paranoia is a Good Thing." Stan says he favors "simple rules like 'Thou shalt not give gifts at all without prior approval.' Doesn’t always work, but at least there is no room for interpretation." I agree.

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Chinese Law Prof Blog recently did a post on Chinese law journals in English. His list consists of the following journals currently in publication:

Frontiers of Law in China.

Peking University Journal of Legal Studies. No online edition, but you can subscribe here.

Tsinghua China Law Review. This is brand new, but it shows tremendous promise. I was provided with its first issue and I was quite impressed. It reads like a legitimate U.S. law school law journal in pretty much every respect. The Tsinghua journal's Board of Editors is comprised of "students at the Tsinghua University School of Law, both Chinese law students and foreign students in the LLM Program in Chinese Law." I know its Editor-in-Chief, Carlton Willey, and I know how committed he is on making this Journal a must read for those doing legal business in China. I suggest you check it out.

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I spent my high school junior year living in Istanbul, where my father was teaching while on sabbatical. There was one other American family in our Bebek apartment building: the Richards. Adelle Richards was the matriarch of that family and there are three things I will always remember about her:

1. No matter how many times we told her we were from Kalamazoo, Michigan, she would always introduce us and refer to us as being from Illinois. Frankly, with her listening skills, I was just impressed she even remembered it to be somewhere in the Midwest.

2. When there was a small fire in our building and everyone was evacuated, she asked my father to run into her apartment to take something out, even though her husband was standing right next to her. My father actually did it, but the explanation for that will have to come in another post. And anyway, there ought to be a limit to one trashing per family per post.

3. I absolutely hated seeing her in any of our neighborhood stores because she was such an Ugly American. And when I say ugly, I mean it. Though she had been living in Turkey for about a year, she did not speak a word of Turkish. Not one stinking word. Okay, maybe she could say hello, but she truly could not even count to three, or two, or even one. I am not kidding. As bad as this was, however, it was how she compensated for it that was most ridiculous. She would talk louder. In English. Again, I am not kidding. What I mean was that if she was at the bakery and wanted four of a particular item and the person behind the counter did not now what Adelle meant when she would say "four," she would repeat herself by pretty much screaming out the word "four." Again, I am not kidding. Now, to top it all off, she once boasted (and I was there and I would swear on anything that this really happened) that "I find that if I talk loud enough, they can understand me."

I thought of dear sweet Adelle today when I read a post over at the FCPA Professor Blog, entitled, "The Results Are in...." The gist of the post is that even though everyone in the international law/FCPA legal business knows that the United States government is radically stepping up its FCPA (Foreign Corrupt Practices Act) enforcement, well under half of all U.S. companies have an FCPA compliance program in place. I find this particularly egregious because having a real compliance program is something the Department of Justice and the Courts look at in determining whether to prosecute and in determining sentencing.

Just as every foreign company doing business in China should have an employee manual, every United States (the EU has its own anti-corruption act) should have an FCPA compliance manual and program.

Do I need to pull an Adelle Richards on this issue?

For more on the FCPA, check out the following:

-- The Foreign Corrupt Practices Act. Can You Say China Relevant?

-- China And The Foreign Corrupt Practices Act (FCPA). Sometimes You Just Have To Step Away....

-- China And The Foreign Corrupt Practices Act (FCPA) -- Not Just For Americans Any More

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Matt Schivenza's always interesting blog has a new post up on nudity (well, sorta) in China, entitled, "Foreign Woman Removes Top At Beach in Qingdao, Causes Major Disturbance."

The post tracks exactly what I was talking about this morning with a client. No, not nudity, but rule of law in China and how so many Americans misunderstand its extent in China and misperceive what China is really like.

Bear with me here as I discuss the rule of law in China as the nudity discussion will follow.

The client with whom I was having this discussion is a very successful and sophisticated international businessperson who has been doing business in China for around five years. He was telling me of how an American competitor of his had gotten into legal troubles and was on the verge of pulling out of China. My client told me he thought his competitor had brought the problems onto his company by believing he could get away with not following Chinese laws. We then talked about how when it comes to China's laws relating to business, they are actually usually fairly clear and actually usually not all that bad. We both agreed that companies that follow China's business laws overwhelmingly avoid problems.

But, we both also agreed that what we were discussing had little to nothing to do with China's non-business laws and little or nothing to do with the corruption. In other words, China's business laws, as written are good and following them usually insulates you from problems. But, not following them and having the right connections (which damn few foreigners have, despite their thinking otherwise) can oftentimes serve to avoid problems also.

Which all brings me back to nudity and to Matt's post.

Matt's post is on a Qingdao newspaper article about the reaction to a Bulgarian blonde who insisted on running around topless in the middle of a hot day at Qingdao's Number 1 Beach . This is Qingdao's most popular beach and the last time I was there -- in April -- it was crowded. The Bulgarian caused quite a stir and gave rise to a local newspaper article, which Matt translated.

The article noted how despite the controversy and approbation by many onlookers, the lack of any law clearly prohibiting the conduct precluded anyone from putting a stop to it:

Shortly thereafter, this reporter went to the beach management office, where he was told by a person responsible that although the beach had encountered topless guests in the past, they had never found one daring to go topless in front of so many people. “There’s nothing we can do about it!”. This reporter was told that in the past several days many residents and guests alike have complained about this matter, but because no clear law exists prohibiting this sort of behavior, beach employees simply could not intervene.

Matt sees all this as proof of the rule of law:

I find this story amusing because a) the Bulgarian woman continued sunbathing topless despite what appears to have been an enormous amount of attention on top of the persistent questioning of the reporter, b) that the supposed ‘moral outrage’ involved didn’t prevent beach-goers from crowding around the woman and taking her photo, and c) that rather than compel the woman to put her top back on, the beach officials were preventing from doing so due to the absence of a clear legal statute regarding these matters. See, China is a nation that respects the rule of law!

To a certain extent, I have t