Litigation and Arbitration

China lawyerWay back in 2008 I wrote a post immediately after one of my firm’s lawyers returned from a federal court hearing where the judge essentially said — near as I could tell without any basis in law — that service of an English language only complaint on our client was valid even though she did not speak a word of English and even though the Hague Convention rules on service of process for that particular country explicitly stated that the complaint needed to be translated into her native language. In that post, which follows, I raged (well for me it was raging) against a US legal system that fails to sufficiently account for foreign law.

This post is on private, not public international law. That means it has little to nothing to do with such hot button issues as the United Nations, the Kyoto Protocol, or the International Criminal Court. This post is on how American courts deal with business cases involving foreign parties and foreign or international law as that law applies to such cases. No more, no less.

Many years ago, I was representing a Canadian-Australian manufacturer in a big case down in Texas along with two truly excellent Dallas litigators. At some point in the case, I had the “brilliant” idea of arguing that US Federal law had preempted Texas state law, mandating dismissal of plaintiff’s claims against my client. We settled the case before the court could hear our preemption argument, but I still remember the half-joking advice I received from Texas local counsel. It was something along the lines of, “forget about federal law, this is Texas; we don’t recognize federal law down here.”

I am beginning to wonder about the willingness of US courts to apply foreign or international law, even in those instances where US law calls for such application.

In a few months, I will be in Las Vegas (I count myself among the people who love Vegas!) speaking on the Hague Convention rules on Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters, as they apply to Chinese companies. Based on my firm’s experience with getting US courts to recognize international law, I am sorely tempted to just say something like, “forget about international law. This is the United States. We don’t recognize international law here.” Go ahead, just stick your summons and complaint in a bottle, throw it in the ocean, that ought to be enough for you to get a default judgment anyway. And since China never enforces US judgments anyway, why does it matter?

I am sure my speech will be a bit more nuanced by the time I get there, but you get the point.

For at least the third time (two times is coincidence, three times is a trend), a US court has allowed a case to go forward against a defendant despite the plaintiff having clearly failed to abide by the Hague Convention Rules on international service of process. The most recent instance is in a still pending case so I cannot go into the specifics on that one.

Virtually every time we have sought to get the US courts to enforce the Hague Convention or even, in one instance, when we sought to get a US court to pretty much ignore the Hague Convention, the US court has seemed perfectly willing to rule as though the United States has no obligation to abide by a treaty it signed. I have a strong sense US Courts (both state courts and federal courts) will not enforce the Hague Convention’s technical service requirements (including that the summons and complaint must usually be translated into the language of the country in which it is being served). Oh, and getting a US court to throw out or stay (delay) a case so that an already pending case in another country can be decided first — forget it. My conclusion is that US courts are happy to ignore foreign/international law in favor of handling things under US law, whether US law should apply or not.

Since writing the above, our firm has had a Federal Court ignore Australian law in a case without even deigning to explain why and a state court refuse even to consider delaying the US action based on an already pending case in Spain, and get mad at our lawyers for even making the request!

US court judgments are rarely enforced outside the United States and one of the reasons given for this is the failure of American courts to recognize foreign law. Our foreign clients — international businesspeople from countries like Australia, England, Spain, and Germany that are not generally anti-American — are complaining more and more to our lawyers about US courts “think they can ignore the rest of the world.” Add in a President whose response to countries beyond our borders is a big FU and low-life neo-nazis marching in our streets with torches, and you can understand why so many of my non-American friends have been asking if I am concerned about the United States’ standing in the world and the impact all of this will have on our legal system.

My answer is yes.

Strangely enough, I recently thought through much of the above when analyzing an intellectual property matter on which I worked. The matter was for a European company looking to sue an American company under Chinese law in a United States court. (Please nobody ask me to explain either how the parties got into this situation nor why this contortion was even being considered.) What struck me was how despite all of the things about which I wrote above, my opinion to the European lawyers was that if they were to pursue litigation in a US court they could excpect the court to abide by the law, and since the law was clear (and did not really involve court power as did the cases above), we could expect it to apply Chinese law.

I guess I am standing on history (at least that of the U.S. legal system) for now.

Your thoughts?

Chinese lawyers
Just say no to Hong Kong jurisdiction.

Hong Kong courts are world class and few foreign companies would not rather have their disputes against their Mainland China counter-parties resolved in Hong Kong as opposed to in Yiwu or in Harbin. Hong Kong as the jurisdiction of choice is very alluring. But for all sorts of reasons, it’s a trap.

Let me explain.

Back in 2008 China and Hong Kong entered into a reciprocal enforcement agreement to make judgments from Hong Kong courts enforceable in China, and vice-versa. Foreign lawyers (usually those not experienced with China contracts or China courts) see this and think having their clients disputes resolved in Hong Kong is the way to go. But as is so often true of China, what is on paper does not correspond so well with the real world and most of the time calling for disputes with Mainland Chinese companies to be resolved in Hong Kong is a terrible idea.

Consider a contract between a U.S. technology company and its PRC licensee. [Though our example is of a U.S. company, what we say below holds true for nearly all Western countries/companies as well.] The U.S company seeks to avoid Chinese law by providing for English as the contract language, U.S. law as the applicable law, and enforcement in a U.S. court. The Chinese side refuses and insists on the opposite: Chinese language, Chinese law and enforcement in a Chinese court. As a compromise, the U.S. side proposes the following: English language, Hong Kong law and enforcement in a Hong Kong court. The Chinese side readily agrees and the contract is signed.

Why did the Chinese side agree? It agreed because it knows this “compromise” has created the worst possible situation for the U.S. company. The contract is NOT enforceable against the Chinese company, so the Chinese company is off the hook for any liability. On the other hand, the contract IS enforceable against the U.S. company, giving the Chinese company substantial power in the event of a dispute. The U.S. company has placed itself in the worst possible position. I have Chinese lawyer friends who brag about setting up foreign lawyers with this “trick.”

There is though a chance both parties will be disappointed because there is a risk the Hong Kong court will refuse to hear the case because the matter has no connection to Hong Kong. Remember that Hong Kong is an entirely separate jurisdiction from China. For this reason, a contract between a U.S. company and a Chinese company governing conduct that will occur in the PRC has no connection to Hong Kong. It is therefore entirely possible the Hong Kong court will refuse to further crowd its docket and will simply refuse to hear the case.

But let’s just assume the Hong Kong court hears the case and renders a judgment. What then will happen? If the Chinese company is the plaintiff and if it prevails, its judgment against the U.S. defendant will be easily enforceable in the United States against the assets of the U.S. company. Hong Kong is a common law country with laws and legal procedure based on the laws of England. U.S. courts regularly enforce such common law judgments and the odds are overwhelming they would do so in this situation as well

But If the plaintiff is the U.S. company and it prevails and then seeks to enforce its Hong Kong judgment in the PRC, the situation is quite different. On the surface, it appears enforcement of the judgment should not be an issue under China and Hong Kong’s  reciprocal enforcement agreement of 2008 which on its face makes judgments from Hong Kong courts enforceable in China. However, Chinese courts regularly ignore this statute by not enforcing Hong Kong judgments.

Chinese courts avoid enforcement in two ways. Sometimes they simply refuse to act. They do not openly reject the demand for enforcement. They instead accept the demand and then do absolutely nothing. This is the most common technique.

The other approach is to find technical reasons to reject the demand for enforcement. Usually the Chinese court will reject the Hong Kong judgment based on a claim that award was based on grounds that violate Chinese public policy. Since Chinese civil law and Hong Kong common law come from an entirely different legal background and legal procedure, it is generally easy for a Chinese court to find a public policy issue.

Often, the Chinese party will not appear in the Hong Kong action. In this case, the U.S. side will obtain a default judgment. Like many Asian courts (and European and U.S. ones as well), Chinese courts are reluctant to enforce any form of default judgment. When the default judgment is from a foreign jurisdiction, the likelihood of enforcement is very low. Knowing this, good Chinese lawyers instruct their Chinese clients not to appear when sued in Hong Kong.

As noted above, a contract between a Chinese entity and a U.S. entity has no factual or legal connection with Hong Kong. Chinese law allows the parties to a contract to chose the applicable law, but when the parties choose a law with no connection to the underlying transaction, Chinese courts typically deem this to violate public policy.

Whether the Court issues a written ruling or simply does nothing, the effect is the same: no enforcement of the Hong Kong judgment against the Chinese party defendant.

So what this all means is that by writing a Hong Kong jurisdiction provision into the U.S. company’s contract with its Chinese counter-party, the U.S. company (or its lawyer) has placed itself in the worst of all positions. First, it must convince a skeptical Hong Kong court to hear a case with no connection to Hong Kong. And since Hong Kong has a loser pays system, the U.S. company usually must post a substantial monetary bond to cover the risk that it will not prevail on its claim. Then it must pay the very high attorneys’ fees and court costs demanded by the excellent Hong Kong legal system. Then it must wait as the Hong Kong court takes what can be a substantial period of time to render judgment when the facts and parties are all foreign to Hong Kong. Then, if and when it finally receives its Hong Kong judgment, the U.S. company will likely learn the hard way that its judgment has no value since it is not enforceable in China. Or even worse, the Chinese party prevails on its counterclaim and the Chinese party is free to enforce its judgment against the American company in the United States. And to top it all off, the U.S. company loses its bond, which goes to pay the Chinese company’s legal fees.

Hong Kong as the jurisdiction for disputes with Chinese companies? Great on paper, but really bad in real life.

China cyber law
Screenshot of Hangzhou Cyber-court Website, showing its Chinese name as Hangzhou Railway Transport Court as of end of June.

China has adopted a plan to establish a cyberspace court in Hangzhou lately. The plan is for this court to accept filings electronically, try cases via livestream and hear only e-commerce and Internet related cases.

Why Hangzhou? As a general rule of Chinese civil procedure law, lawsuits must be brought in the place of the defendant’s domicile. For companies, domicile means their principal place of business or the place where it has its registered address. Hangzhou is home to Alibaba and to many other technology companies, it has been dubbed the “capital of Chinese e-commerce,” and it is the site of the China Cross-Border E-Commerce Comprehensive Test Zone (中国(杭州)跨境电子商务综合试验区). Hangzhou courts have experienced a considerable increase in the number of e-commerce related cases, from 600 cases accepted in 2013 to more than 10,000 in 2016.

Before these most recent plans for a cyber-court in Hangzhou, the Zhejiang High Court launched a pilot program to create Zhejiang E-Commerce Online Court System to better handle Hangzhou’s increasing caseload in Hangzhou. Three Hangzhou trial courts and the Intermediate Court of Hangzhou initially joined this system to try certain e-commerce related cases online. Other than a different space (cyberspace versus an actual courtroom) for the actual litigation/trials, there are no significant differences between the online court and traditional courts. The Zhejiang E-Commerce Court website explicitly states that its litigation processes will strictly follow China civil procedure law.

What Cases Will the Cyber-Court Handle? The Cyber-court will have general jurisdiction over certain Internet and e-commerce related cases in the Hangzhou area. Although the Cyber-court’s website is currently inaccessible, according to the Zhejiang E-Commerce Court website, the following cases (over which the existing trial courts in Hangzhou would normally have original jurisdiction) will be tried by the Cyber-court beginning on August 18, 2017:

  • Disputes regarding online purchases of goods, online service agreements, and small [online?] loan agreements;
  • Disputes regarding “internet copyright” ownership and infringement;
  • Infringement on personal rights (e.g. defamation) using the Internet;
  • Product liability claims for goods purchased online;
  • Domain name disputes;
  • Disputes arising from Internet based administration;
  • Other civil and administrative cases concerning the Internet assigned to the Cyber-court by a higher court.

No matter in which district of Hangzhou a defendant is domiciled, cases that come within the above list should be filed with the Cyber-court instead of with the trial court in the previously relevant district.

How to file a case with the Cyber-court and Attend trials? Please note that because the Cyber-court’s website is currently offline and inaccessible we have had to base the information in this section on what we obtained from the website back when it was live in July and from news reports. The Cyber-court will use an online platform that allows people to file cases and attend trials. To be able to use this platform, users must first verify their identity and then register for an account. There are two options for doing this. One is to physically go to Hangzhou and show your ID to the court clerk, which to a large extent defeats much of the purpose of having the online court system. The other is to have your identity verified through Alipay (Alibaba’s payment service). If you already have an Alipay account and Alipay has verified your identity (because you probably used Taobao before), such a verification will be accepted by the cyber-court’s system.

Once you have a cyber-court account, you can file a complaint, submit evidence, and request service of process through this platform.

You can attend your trial remotely by entering a verification code on a webpage. Transmission of audio or video of any hearings and trials and the evidence presented and other data exchanges will be encrypted using security technologies provided by Alibaba Cloud.

Implications. For people who do not live in Hangzhou area and want to sue someone there based on causes that are within the Cyber-court’s jurisdiction, the new system sure will make that more convenient. It also will likely make rulings on internet and internet related cases more consistent and thereby give more and better guidance to potential and actual litigants

But I also wonder whether all of what has been put under the cyber-court’s jurisdiction makes sense. Take product liability as an example. How is a product liability claim for goods purchased online any different than that for goods purchased physically in a store? In what will the cyber-court be better able to handle such a claim? There may be difference in online and offline purchase agreements for issues such as where the defendant resides, the place of execution or performance of the agreement or jurisdiction. But those are typically answered by existing product liability law, contract law, and civil procedure law and there is no single “Product Liability Law for Cyberspace.” Do we need a separate cyberspace law or is it just the Law of the Horse? Many countries, including China, have separate maritime and IP courts and those have generally worked well. Does it make sense to have a separate court handle internet disputes? I hate to sound trite, but time will tell. Is this a genuine attempt to reform e-commerce and embrace technology? Will this one cyber-court eventually assume nationwide jurisdiction of internet claims (not likely)? Will other regions in China create their own cyber-courts? What have other countries done on this front? Please comment below if you know!

Does it make sense to have the system rely so heavily on one company’s technology (Alibaba’s)? Did it have any real choice? How secure is Alibaba’s technology as to data and privacy protection? What protections are in place to prevent Alibaba from appropriating and using the litigation data?

Finally, as with most new developments involving cyberspace and e-commerce in China much about the cyber-Court remains  unclear and will likely change, and fast. I will be covering the changes so please stay tuned.

notarization, appostille, consularizePretty much every week, our China lawyers get emails or phone calls from someone (probably half the time a fellow lawyer) seeking assistance with making a document legal for some sort of use somewhere in the world. Maybe 40 percent of the time, the request relates to a need to authenticate an official Chinese document or government record so it can be used in a United States court or government filing or U.S. transaction. Maybe another 40 percent of the time, it’s essentially the opposite: the person needs a U.S. document authenticated so it will work for a Chinese court or a Chinese government filing or China transaction.

Much of the time, the party reaching out to us expects a quick answer that will allow them to do what they need to do, at little to no cost or for us to do it for a couple hundred dollars. Pretty much without exception though, we have to burst that bubble by explaining how these things can be quite complicated and time consuming and, hence, expensive. The reason being that what is actually required varies in pretty much every instance, depending on the exact reason the authentication is needed and if they wish us to provide them with legal counsel we will need to do the following:

  1. Research exactly what will be required. This typically involves our reviewing the law and talking with the appropriate government official (especially if it is China).
  2. Oftentimes, we must arrange with a notary in a specific city to notarize a document and many times we also must deal with the appropriate Secretary of State (or comparable) for an apostille or comparable and with the appropriate consulate or embassy or court for the consularization or legalization. Accomplishing these things can be incredibly time consuming as they often involve multiple letters and phone calls, and even occasionally flights when things get delayed.
  3. Translations are also often required.

Just saying….

 

China employment lawyers
Don’t pay twice for your employee’s vacation

Employers in China are constantly getting sued over employee vacation days. The very short version of the general rule is that any employee who works continuously for one year is entitled to statutory annual paid leave (a/k/a paid vacation days). This is not news to China-based foreign employers as their parent companies all have vacation policies. However, what is not so well known is the legal requirement that they make arrangements for the employees to be able to enjoy their statutory vacation days. What this means is that employers in China must stay on top of how their employees take (or not take) their vacation days and, more importantly, they must pay their employees for unused vacation days, unless they can prove the relevant employee has voluntarily given up such vacation days. But the tricky part ain’t over.

Foreign employers in China far too often assume their employees cannot prevail on claims for payment for unused vacation days if they have waited too long. But this is only sort of correct. As with pretty much everything else involving China employment law, how the statute of limitations is calculated varies. Some courts treat compensation for unused vacation days as normal wages and apply the longer statute of limitations and give employees until one year after their employment is terminated to sue for all such compensation. Some courts treat it as a pure penalty payable by the employer and apply the shorter statute of limitations, which may bar a portion of the unused vacation pay the employee is claiming to get. Some courts completely ignore the issue of statute of limitations and this usually means an employer that cannot produce evidence to show its employee actually took the vacation days at issue will need to pay for any “unused” vacation days, no matter how long ago.

Our China employment lawyers advice our clients not to focus on how a particular Chinese court in a specific city will apply the statute of limitations on any given day, especially since courts in different districts in the same city have been known to use different standards. Rather, we tell them to focus on working to prevent the problem. From day one, your HR department should be keeping track of how each of your employees takes his or her vacation days. If there are lingering issues or claims, clean them up right away. Get your employees to execute an agreement (in Chinese!) making clear the employee acknowledges having been paid in full for any unused vacation days.

Though employees in China should plan their own vacation days and do have the freedom to give them up, it is not a good strategy for an employer to leave it to their employees to track and/or accumulate their vacation days without checking. When employees sue for vacation time years after that time was accrued, you want to have good evidence that no payment is owed.

China employment laws and foreign companies. One tough mudder.
China employment laws and foreign companies. One tough mudder.

The China Labor Bulletin just did a post revealing something my law firm’s China lawyers (especially our China employment lawyers) have sensed/felt for quite a while: China employees increasingly know their rights and have no compunction about doing what they can to enforce them:

While latest national LDAC case data compiles data only up to 2015, local government reports reveal more recent statistics, and tell stories of the rising rights awareness of workers.

A whitepaper on labour disputes from Guangzhou noted the increasing diversity of grievances raised by workers in recent years. Unpaid social insurance, for example, account for over 40% of all arbitration cases over the past three years. Women workers are an increasing portion of all cases, and are taking action against unequal treatment, illegal firings or wage cuts during pregnancy or maternity leave, and discriminatory hiring practices.

Though this article does not specifically address employment cases against foreign companies doing business in China, I would venture to bet that employment disputes between Chinese employees (and expat employees as well) and foreign companies have increased at an even faster pace. We see this in the number of emails we get from both employees (expats mostly) seeking to sue and from employers threatened with lawsuits. In virtually every employment dispute we take on as counsel, however, the parties eventually settle, meaning they never become a part of any Chinese government statistic.

I wrote on this last year for Above The Law, in an article entitled, China Employment Disputes: Settle, Settle, Settle: Attorney Dan Harris says there’s only one way to deal with labor disputes in China. That article started out with the following:

Every few weeks, one of our China lawyers gets an email from a foreign company (virtually always a WFOE) that is in a dispute with one or more of its China-based employees. These foreign companies are usually surprised to find themselves in such a dispute because they are of the view that they did nothing wrong. They too often believe that hiring my law firm will consist of us spending an hour or two reviewing the facts and the law and then telling them that they did nothing wrong and then making the case go away.

The only difference today is that we are getting those emails every single week, and usually more than one. But what hasn’t changed is what causes foreign companies to get themselves in this situation, nor what they need to do to get out of them. The two leading causes for the employment disputes we see are a failure to have a well-crafted set of Rules and Regulations combined with maladroitly handled employee terminations. See China Employee Termination: Avoid These Mistakes. We also have seen no slow down in foreign companies getting into big trouble for having “employees” in China without their actually having a China WFOE to serve as the employer. See Doing Business in China with Deportation or Worse Hanging Over Your Head.

Bottom Line: China wants foreign companies doing business in China for financial reasons and those companies that are not fulfilling their China financial duties, be it via taxes or employee payments are at risk.

China litigation
Owed money by a Chinese company? Sometimes you just have to sue.

Nearly every week, an American or a European company (or sometimes an Australian company) will write to one of our China lawyers asking what it can do to get paid on its contract. The amounts typically owed are between $50,000 and $250,000, but sometimes they run deep into the millions.

These companies writing us are not our law firm’s existing clients because we so strongly advocate not doing deals with Chinese companies without getting a substantial payment upfront. See Want to Get Paid by a Chinese Company? Do These Three Things:

Demand a large amount upfront and make clear both orally and in your contract that you will not begin work or ship your product until you receive the full amount of this initial upfront payment. Having a large upfront payment works both to prove good faith by the Chinese side and to prove that the Chinese side is able to make large payments outside of China. China’s currency, the renminbi, is still a nonconvertible currency and any time a Chinese entity wants to send US currency to a foreign entity (greater than $50,000 a year), it needs approval from the transmitting Chinese bank. This generally requires the parties to have executed a contract (in Chinese) for goods or services that are acceptable for foreign entities to provide, and that the foreign company has submitted a formal invoice in a form acceptable to the bank — because the bank in turn usually needs to get approval from government authorities. For the specifics on what is required to get paid by a China company, check out Service Companies In China. How To Get Paid.

These companies writing us for help in getting paid are obviously past the point where a well-crafted contract can help them and they want to know exactly what they should do to get paid. One of our China attorneys recently responded as follows to such a company with very large amounts owed to it by two Chinese companies, one a State Owned Entity (SOE) and the other a privately-held Chinese entity (I have modified the email a bit to hide any possible identifiers):

Usually the best way to collect money owed to you by a Chinese company is to file a lawsuit. Otherwise, the Chinese company will probably just ignore you. The problem, of course, is that lawsuits by WFOEs against SOEs are not favored in China. If your claim has any defect, that defect will normally defeat the claim. However, filing a suit can provide you with leverage in any settlement negotiation. Your case against the privately-held company will probably be easier. But for both cases, much will depend on the quality of your contract and until we review those contracts we would only be guessing at your chances.

Sending demand letters to Chinese companies tends to be a waste of time, though they often make sense to confirm the default, if such confirmation is required under the relevant contract. Most Chinese companies ignore demand letters and this is especially true of SOEs. These two companies have been the clear decision not to pay you and unless and until you sue them, they probably will stick by that decision. In fact, sending a demand letter from your lawyer is seen by many Chinese companies as a sign of weakness. They are of the view that if you are really going to sue them, you would do so and not just send out letters. Those who send demand letters are too cheap to hire a lawyer to do anything more.

So that leaves filing a lawsuit against these two Chinese companies. But lawsuits are rarely inexpensive and filing one will permanently affect your relationship with these buyer and it could hurt your standing in the _______ industry in general. Litigation should therefore be initiated only after careful consideration. I cannot assess your chances of prevailing in litigation until after a review your contracts and other documents and get a much better sense of the entire factual situation. But I can tell you that just like in the United States, litigation in China is expensive (though usually considerably less expensive than in the United States, slow (though usually considerably faster than in the United States) and uncertain. So pursuing litigation is not a course to be taken lightly. However, when you are being ignored, it is the only affirmative action you can take.For what it is worth though, the World Bank recently ranked China as the fifth (5th) best country in the world in terms of contract enforcement!

Using an “intermediary” is a standard “old school” Chinese practice. Provided no bribe is given to this intermediary and provided this intermediary acts pursuant to China law, using such an intermediary is not illegal. [This was mentioned because the company owed the money said that someone had told it to collect the debt in this way]. These intermediaries typically charge a percentage of what they collect and you should measure that percentage against the cost of litigation. The problem with using an intermediary though is that you become dependent on the intermediary and your contract with that intermediary may make it difficult or impossible for you to sue your creditor if and when you wish to do so  and you become liable if your intermediary for whatever it does that is irregular or illegal. Most importantly, its chances of success are uncertain and we have seen instances where intermediaries have not only failed to collect, but the things they have said and done have essentially ruined the chances of succeeding in any lawsuit.

Using an intermediary in your case seems particularly problematic for two reasons. How is an “intermediary” going to convince an abusive SOE to pay its bill to you a WFOE? It sounds far fetched to me, but I don’t have all of the facts. Two, you are coming up against a statutes of limitations that may prevent you from ever being able to sue these two companies. The last thing you want to do is miss out on your opportunity to sue because you are bogged down using an intermediary. I do not know enough about your case to tell you how to proceed, but I can tell you that we generally advice against companies using intermediaries to collect on their China debts.

If want me to review the contracts and other documents that would support your claims, I am available to do that.

China trade casesPresident Trump’s promises of tougher enforcement of U.S. trade laws has triggered the filing of an unprecedented wave of new antidumping (AD) and countervailing duty (CVD) petitions in the past few months. The U.S. already has many 397 AD and CVD orders in place, going back as far as 1977.  These orders cover 157 different products imported from 43 different countries. Most of these AD/CVD orders (by far) are on Chinese products, ranging from aluminum extrusions to xanthan gum. But just how effective are these AD/CVD orders? To what extent do these AD/CVD orders help certain domestic United States industries, but also harm other domestic industries? What kind of unintended consequences result from these cases?

To answer these questions, I look at one of the older AD orders: fresh garlic from China, which has been subject to AD duties since 1994. One reason why this order has lasted so long is because the domestic U.S. garlic industry has been able to show it would be vulnerable to material injury if the AD order on Chinese garlic were revoked. Gilroy, California may call itself the “Garlic Capital of the World,” but it is China that produces around  75 percent of the world’s garlic. China produces approximately 20 million tons of garlic a year as compared to the United States, produces around 175,000 tons. This disproportionality has allowed U.S. garlic producers to successfully claim they would be obliterated by a flood of cheap Chinese garlic were the AD order ever to be removed.

The vast majority of U.S. fresh garlic is grown in central California, but growing garlic there is getting tougher because of a tightening supply of land, labor, and water there. California garlic acreage planted is down significantly from 2000, and recent US garlic crops have been affected by white rot, a soil disease. Harvesting and packaging fresh garlic requires manual labor which has been hard to find, and likely will get even harder under Trump’s anti-immigration policies. California garlic growers face fewer available workers and increasing labor costs, as fewer people want to work on farms.  And as strip malls and suburbs creep towards farmland, property values are rising, making it even harder to find affordable housing for farmworkers. Garlic has also suffered from drought conditions in Central California for five years running and competition for scarce water resources has jacked up water costs for garlic growers.

The U.S. consumes about 260,000 tons of fresh garlic annually. After taking out the U.S. garlic used to make dehydrated garlic or as seed bulbs for the next garlic crop, U.S. garlic producers can now satisfy only about 30-40% of U.S. annual demand for fresh garlic. So, some imports are needed in the US market. Can AD/CVD laws effectively screen out unfairly traded garlic, while allowing in only the fairly traded garlic to fill the demand gap?

In the first few years after the AD order, Chinese garlic imports were completely shut out and U.S. garlic prices initially stabilized and then steadily increased. But by the mid 2000s, the US market price for garlic had risen so high that Chinese garlic could show they were selling at non-dumped prices even after absorbing initial AD duty deposits at 376%.

Between 2002 and 2007, the Department of Commerce (DOC) calculated zero or very low dumping margins for about a dozen Chinese garlic exporters. Not surprisingly, the volume of Chinese garlic imports into the United States increased, hitting about 72,000 tons in 2007. Since 2008, however, no Chinese garlic exporters have gotten any low AD margins calculated by DOC. More importantly, DOC has steadily knocked out Chinese companies that previously had low dumping margins, either by calculating higher updated margins in these later reviews or by applying the PRC-wide rate of 376% (or $4.71 /kg) because the responses from the Chinese garlic companies were deemed inadequate.

Out of all those Chinese companies that previously received a zero or very low AD margin, only one company, Zhengzhou Harmoni Spice (and their US affiliate, Harmoni International Spice), has been able to maintain an exemption from AD duties. This is because Harmoni worked out a deal with the California garlic growers (Petitioners) whereby Harmoni agreed to supply Chinese garlic to the Petitioners in exchange for the Petitioners agreeing not to request the DOC conduct another administrative review for Harmoni, which could result in Harmoni losing its zero dumping margin.  Some disapprove of such arrangements as an inappropriate gaming of the system that allows the domestic industry to manipulate the trade laws to its own benefit. But others view these as reasonable settlements that allow both sides to benefit in some way from the DOC not conducting a review.

In this garlic case, Harmoni clearly benefits as the sole Chinese garlic exporter with full access to the US market because it does not have to pay any extra AD duty costs or deal with burdensome DOC reviews. Petitioners also benefit by getting access to lower cost Chinese garlic they can use to supplement their own production and improve their overall profitability. Petitioners saw Harmoni as a “good” Chinese garlic exporter who would act responsibly in the market and not drive garlic market prices down, unlike all the other “bad” Chinese garlic exporters. Since 2004, Petitioners thus have not included Harmoni in their annual review requests that usually target all the other Chinese garlic exporters. Under US trade laws, DOC annual review requests can be filed by domestic producers, US importers for their own Chinese suppliers, and Chinese suppliers only for themselves; Chinese suppliers cannot request reviews for other Chinese suppliers.

The AD duties imposed on garilc increase costs that ultimately are borne by the consumer. But when fresh garlic costs are such a tiny part of your fettuccine alfredo, consumers are willing to absorb or are blissfully ignorant of those extra AD duties that inflate the price of garlic and the garlic wars are mostly being fought outside the public eye.

However, the cozy arrangement between Harmoni and Petitioners is now at risk of falling apart, depending on DOC’s upcoming final decision in the latest garlic administrative review. The other Chinese garlic companies, unhappy at being excluded from Harmoni’s arrangement with Petitioners, found a couple of New Mexico garlic growers to serve as “domestic producers” who last year filed requests that DOC conduct a review of Harmoni. Petitioners and Harmoni immediately pointed out that these New Mexico garlic farmers did not have standing to file the review request because they were not really domestic producers like the large scale commercial garlic farms run by Petitioners that account for about 80% of US garlic production. DOC disagreed and has accepted the New Mexico growers’ review requests and initiated a review for Harmoni. In December 2009, DOC issued a preliminary determination noting that Harmoni had not responded to the Department’s questionnaires and would receive the PRC-wide rate.

Harmoni and Petitioners, however, are still arguing that the review for Harmoni should still be terminated because the review request filed by the New Mexico growers was fraudulent and cannot be a valid basis for a DOC review. DOC has received numerous filings with sordid details of how the Chinese garlic growers and their US attorney planned to use the New Mexico growers just to undermine Harmoni’s arrangement with Petitioners. Late in this review proceeding, one of the two New Mexico garlic growers withdrew his support of the original Harmoni review request once it realized it was just being used as a pawn by the Chinese garlic growers. Harmoni has also filed a federal racketeering action that is still pending against the Chinese garlic companies and their US attorney for conspiring to defraud the U.S. government by filing false documents with DOC.

We will soon find out in DOC’s upcoming final determination for this garlic review whether DOC will accept or reject the New Mexico garlic grower’s review request and thus whether Harmoni’s arrangement with Petitioners will collapse or continue. But the fact that DOC has even preliminarily accepted this New Mexico review request highlights how DOC’s administration of the AD/CVD laws is so unpredictable that even the domestic industry cannot count on how these cases will turn out. DOC’s acceptance of the New Mexico garlic growers’ review request for Harmoni is particularly surprising because the Trump administration has been so unabashedly protectionist and DOC claims to administer the AD/CVD laws to protect the domestic industry from unfair trade.

The AD duties on Chinese garlic thus far have significantly restricted Chinese garlic in the U.S. market. In part because of the high AD duties, US garlic prices are among the highest in the world. Petitioners have been able to find a “fair” Chinese garlic company to help supply them with lower cost Chinese garlic, while still blocking all other “unfair” Chinese garlic companies. And yet, this arrangement that has benefited the domestic industry may come undone if DOC continues to accept the Chinese/New Mexico review request of Harmoni. Given the difficulties unrelated to Chinese garlic (rising land, labor, and water costs), the last thing the “real” US garlic producers need is an unfavorable decision from DOC that will shut down Petitioners’ access to “fair” Chinese garlic and open the door to “unfair” Chinese garlic returning to the U.S. market. DOC’s handling of this garlic review request issue demonstrates the US AD/CVD laws are blunt tools that are inconsistently applied by DOC and often result in unexpected and unintended consequences that do not help the domestic industry.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Another Canadian lawyer expects these cases to increase as well:

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

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

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

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

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

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

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

Isn’t international litigation fun?

 

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

 

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

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

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

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

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

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

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