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Doing Business in China: Don’t Bribe Anyone, Even Indirectly

Posted in Basics of China Business Law

Because this blog is more than ten years old, there is hardly a China business or law situation of which we have not written at least once. Last week, one of our China lawyers got an email from a company wanting to hire us because they needed help finding someone to bribe someone in China because “it would be too risky for us to do it ourselves.”

It reminded me of a previous email (which had not been to me, but which I thought I remembered from a blog post, and I was right. That post was from April, 2014, and it was entitled, Dude, Didn’t Your Mamma Tell You Not To Engage in China Bribery Through Intermediaries? Rather than craft a new blog post, I will simply borrow from the old one, because nothing has changed. Or one might say that a lot has changed because China itself has massively stepped up its own anti-corruption enforcement.

That post involved a similar email:

After repeated attempts by our ________ [in China] to retrieve the goods/money by bribes and threats without success, we must now look at other options.

A younger me was incensed:

Are you kidding me? Are you friggin kidding me?

I immediately wrote back to say that my firm had no interest in working on the case because it did not make economic sense to hire us to pursue the amount at issue and also to sternly warn him (it was a male) that using an agent to pay a bribe is blatantly illegal. I also strongly suggested that he contact an attorney in his home country to figure out his best course of action for dealing with what he had already done in terms by using an intermediary to pay a bribe.

I then explained the issues in paying bribes, even through intermediaries:

Using intermediaries to pay bribes is illegal under every country’s anti-corruption act of which I am aware and it is certainly illegal in the 40 countries that have ratified the OECD Anti-Bribery Convention and under China’s anti-corruption laws. To oversimplify, you are bound by the anti-bribery laws of all of the countries in which you conduct business.

In bribery law terms, an “intermediary” can be roughly defined as any third party who assists in some aspect of your foreign business. This can (and usually does) include your sales agent, your joint venture partner, your distributer or reseller and even sometimes your OEM manufacturer.

Using intermediaries overseas does not protect you from the risk of going to jail for corruption, it INCREASES that risk. Most corruption cases involve conduct by third parties.

You should be conducting reasonable due diligence on those with whom you conduct your business to determine that they are not involved in corruption. You also should be making clear to the third parties with whom you deal (both in writing and otherwise) that you will brook no corruption on their part — especially on your behalf. And you should record all of this so that if you are ever investigated, you have something to show the government (whatever government that may be) all that you did.

 

‘Nough said.

China, Indiegogo, Kickstarter, The Internet of Things, Marshall Goldsmith, and Suing Your Lawyers and Sourcing Agents Because It Is Getting Really Really Bad Out There

Posted in China Manufacturing, Internet, Legal News
Increase your odds of hanging on to your IP

              Increase your odds of hanging on to your IP

One of our internet of things hardware clients recently told me how none of what he has learned about the need to protect his intellectual property from China had ever been even hinted at in any of the many IoT seminars he had attended nor in the Indiegogo Hardware Handbook he had “religiously consulted” before he did his first IoT product.

I am about halfway through Marshall Goldsmith’s truly stellar book, What Got You Here Won’t Get You There, so I was quickly able to provide a compelling exclamation for why this was the case:

Everything in an organization is designed to demonstrate commitment to positive action — and couched in terms of doing something.

Likewise, the recognition and reward systems in most organizations are totally geared to acknowledge the doing of something. We get credit for doing something good. We rarely get credit for ceasing to do something bad.

CEOs don’t proudly announce that they decided not to acquire another company or go into another country or event that they just went another month without having their IP ripped off by China. Those at seminars and at Indiegogo (and I have no reason to believe Kickstarter is any different) are essentially boosters encouraging their troops. Talking about the need to protect IP is just too negative.

A lawyer’s role is different. Our job is to figure out and minimize risks. And these days, the biggest risk our China lawyers see, day in and day out, is Western companies losing their IP to China — especially tech companies and even more especially Internet of Things companies.

Less than a month ago, in China and the Internet of Things and How to Destroy your Own Company, I wrote on how our China lawyers are getting inundated with hardware and technology companies coming to us after they have lost or badly compromised their intellectual property and their hardware product and their company. To use farm-speak, they are asking us to close the barn door after at least some of the pigs have already left the farm.

Last week, in Worthless China Contracts: First, Let’s Sue All The American Lawyers, I wrote about how the lawyers for these companies deserve a large chunk of the blame. I am now adding the crowdfunding companies and the hardware consultants and as complicit in ignoring the intellectual property risks inherent in giving your IP to Chinese companies with nothing more than an essentially worthless US-Style NDA.

In China and the Internet of Things and How to Destroy your Own Company, I wrote about the China attorneys at my firm having been contacted by companies with the following issues:

  • A European company with a highly profitable product is being threatened with a patent infringement claim by its Chinese manufacturer angry about the European company’s plans to diversify its manufacturing risk by finding an additional manufacturer.
  • An American company with high profitable technology came to us with an illegal joint venture arrangement such that we have our doubts that there is anything that can be done to fix it or, more importantly, fix the various problems the joint venture is inflicting on this American company.
  • A few more instances of American companies having signed what they believed to be non-binding MOUs with their Chinese manufacturers that are actually binding contracts that give their manufacturers all or some rights in the American companies IP.

We recently took on two new matters where sourcing agents shopped our clients product around China and then signed up less than reputable Chinese manufacturers, all without any IP protection in place. And guess what, our clients are now scrambling to try to save what they have. In my post calling out American lawyers for failing to protect their clients I suggested that companies that have lost their IP to China consider suing their lawyers for the damages caused. I am not suggesting anyone sue Indiegogo for its handbook or any of the seminars or its participants for their failure to discuss IP. But it has definitely reached the stage where we are suggesting to our clients that they consider suing their sourcing agents. Nearly a decade ago (yes, you read that right), in China Consultant, Protect Thyself, I wrote about the “huge liabilities” China consultants were inadvertently taking upon themselves by doing the following:

  • If you take a sample to China and start showing it to potential manufacturers without FIRST putting in place various safeguards, you are courting disaster. The sample could be used for counterfeiting. We had a consultant call one of our China lawyers in a panic after returning from China to learn that one of the manufacturers to which he had shown a sample had already started manufacturing the product for someone else using the consultant client’s trademark which it had gleaned from the Internet. The Solution: Never show a sample or product plan or reveal your trade name(s) without first making the Chinese manufacturer sign a China-centric NNN Agreement (essentially a hopped up NDA that protects against competition, circumvention and disclosure). Chinese manufacturers tend to be quite familiar with NNN agreements and if you give them a simple and reasonable one, in Chinese, they will sign it.

  • You the consultant must do more than simply negotiate the price and delivery dates or you should at least make clear in writing that these are your only tasks. Typically, product sourcing consultants oversee the OEM contract with the manufacturer and by doing so, they face major liability issues if that contract is not up to snuff. You are the “China guy” and your client is counting on you to guide it through China’s business minefields. You are the one who is supposed to know anything and everything about what it takes to do business in China. Equally importantly, with the manufacturing of its product, your client is probably turning over to the manufacturer all sorts of critical intellectual property. Your client probably thinks that its existing patents, trademarks and copyrights will protect it in China, but a court will expect you as the China expert to know better. The Solution: Put in writing with your client that you will not be providing it with legal advice and that it will need to retain its own lawyer to draft the OEM agreement with the Chinese manufacturer. Put in writing that it is your client’s responsibility to protect its intellectual property in China and that to do so, it must register its IP in China, either through a lawyer with whom you connect them or independently).

Just remember that your client sees you as the expert at doing business in China and it is looking to you for help in all areas and if you fall short in any way, you are at risk for a lawsuit.

As China and its companies seek to move up the product and innovation value chain, things are only going to keep getting worse. It is as bad as we have ever seen it out there and there is plenty of blame to go around.

China Trademark Registration: Keep it Real

Posted in Basics of China Business Law

 

When registering your China IP, don't use a fake

Just got off the phone with a U.S. company that just learned that the Chinese company (they cannot even remember who it was) it paid to register its trademark in China 3-4 years ago never did so — though it received what it now realizes is a fake China trademark registration certificate. I can’t tell you more about this case because it is so new, but it very much reminds me of the following case study in The Sovereign Group’s 2015 China Market Entry Handbook (which I have in my office because one of our China lawyers wrote the IP section for it) entitled, The Case of the Shanzhai IP Agent:

A North American food company that had become quite successful selling its food product in China learned that a company in Beijing was selling counterfeits of its product. Believing it had registered its trademark in China, the North American company began preparing to sue the Beijing company. In the process of doing so, the North American company learned that while it had retained and paid a purported trademark agent to file a trademark, they had never received a trademark certificate, and the “trademark agent” had in fact taken their money and done nothing.

Without a registered trademark in China, the North American company was powerless to stop the counterfeiter. Its only option was to register its brand name as a trademark, wait more than a year until the trademark proceeded to registration, and then send out a cease and desist letter.

The best way to protect your brand name in China has not changed: register the brand name as a China trademark now, so that when you need to defend it, you already have the registered trademark in hand. And don’t be afraid to ask for references. Reputable service providers will not hesitate to give them.

 

It was true then and it apparently is true now. Register your trademarks in China, but do so through someone you can trust, or maybe don’t bother at all?

How to Conquer China Payment Scams

Posted in China Business
Watch your money closely.

Watch your money closely.

Our China lawyers are getting a new wave of American (and one European) companies contacting us about having fallen victim to what we call the China bank switch scam. The amounts lost have ranged from $22,000 to $285,000.

Our general response to these is as follows:

I am sorry this has happened to you, especially since your chances of getting back all of your money are very low.

If you were to retain us, we would charge you by the hour to do the following:

1. Work with your insurance broker and your insurance company to see if it will cover you for this loss. This is usually your best chance of recovering all that you have lost. We can help by explaining how these scams happen and why you are entitled to coverage under your policy, assuming that is indeed the case.

2. Try to get some monetary contribution from your Chinese supplier by letting it know that it was their computer system that the scammer hacked and therefore it should pay at least some of your loss. This works maybe half the time in getting maybe half of the money back, usually over time. Much will depend on your existing relationship with your Chinese supplier and on what it perceives its future relationship with you will be. If you have already corresponded with your supplier regarding this situation, we will want to examine that correspondence.

3. Try to determine if there is any chance in recovering anything from the perpetrator. This is a very expensive and time-consuming process and it makes sense only when you have lost a lot of money.

The bank switch scam is the most common, most pernicious and most difficult to detect China scam of which I am aware, and it just unrelentingly keeps happening. And even though the business relationship is between a Chinese company and a Western company, the perpetrator of the scam oftentimes is in Nigeria or in some country other than China.

This scam usually involves your regular Chinese supplier asking you to make a payment or payments to a new bank account, though it sometimes can involve your very first payment to a new Chinese supplier. Then even after you make the payment or payments, your China supplier insists you still owe it the full amount (oftentimes with added fees) because it never received your payment. When you explain to your China supplier that you in fact did pay it, your supplier points out that the bank account to which you sent the funds is not theirs and that you still owe the money.

This all happened because your Chinese supplier got hacked, either by someone outside or within the company and you indeed have yet to pay it. Or maybe it was you who got hacked.

I wish that I had some new method of preventing this scam (just as I wish that everyone who does business internationally would read this post so that this scam never happens again). But I must resort to saying what we have been saying all along.

We are constantly writing about this scam on here in an effort (failing, I’m afraid) to prevent it from happening again. This is a scam that can happen to YOU. We have seen many smart, worldly, sophisticated companies of all sizes get caught up in this scam.

I am writing this post today not just because our China attorneys are again getting a bunch of China bank scam emails and phone calls, but also because a loyal reader sent me a great article, entitled, Mattel fought elusive cyber-thieves to get $3M out of China, regarding how this happened to Mattel and how, by acting quickly Mattel was able to get its money back.

The article starts by setting the scene of how it was that Mattel sent $3 million dollars to a scammer’s bank account:

The email seemed unremarkable: a routine request by Mattel Inc.’s chief executive for a new vendor payment to China.

It was well-timed, arriving on Thursday, April 30, during a tumultuous period for the Los-Angeles based maker of Barbie dolls. Barbie was bombing, particularly overseas, and the CEO, Christopher Sinclair, had officially taken over only that month. Mattel had fired his predecessor.

The finance executive who got the note was naturally eager to please her new boss. She double-checked protocol. Fund transfers required approval from two high-ranking managers. She qualified and so did the CEO, according to a person familiar with the investigation who spoke on condition of anonymity because he was not authorized to speak about the matter. He declined to reveal the finance executive’s name.

Satisfied, the executive wired over $3 million to the Bank of Wenzhou, in China.

Hours later, she mentioned the payment to Sinclair.

But he hadn’t made any such request.

Realizing it had been duped, Mattel acted quickly by calling their U.S. bank, the police and the FBI, all of whom told Mattel it was “out of luck” because the money is already in China.

Note that this version of the scam is a bit different than that I outlined above. This is a variant known as the “fake CEO” or “fake president” scam, and it is — not surprisingly — more commonly experienced by massive companies than by SMEs:

Mattel’s millions were swept up in a tide of dirty money that passes through China and that Western police are only beginning to understand. The scam the company fell victim to — known as the fake CEO or fake president scam — has cost companies, many of them American, over $1.8 billion, according to the FBI. Most of the stolen money passes through banks in China or Hong Kong, the FBI said.

China has become a popular destination for such scammed funds because cooperation between U.S. and China law enforcement is so weak. The criminals attacking Mattel in this instance had the $3 million sent to Wenzhou, “a gritty enclave on China’s eastern coast that is emerging as a significant transit point in global money laundering networks. The city is the destination for 90 percent of the funds stolen through fake CEO scams in Europe, according to an intelligence memo reviewed by the AP. Wenzhou city officials declined to comment.”

Mattel quickly notified Chinese police, “who quickly launched a criminal investigation, according to a letter from Mattel thanking Chinese authorities, which was obtained by the AP”:

When the Bank of Wenzhou opened the following Monday, a China-based anti-fraud executive from Mattel strode past the sculpted lions that flank the entrance to the bank’s headquarters, marched upstairs to the International Business Department and presented a letter from the FBI, according to two people familiar with the investigation who were not authorized to speak publicly.

Chinese police froze the account that very morning. Two days later, on May 6, Mattel got its money back, according to the letter.

Mattel wrote that the Wenzhou police “showed a great sense of responsibility and enforcement capability.”

“We hereby reiterate our appreciation,” Mattel wrote. “We also hope that this case can pave the way for future international cooperation in fighting similar transnational crimes.”

*     *    *    *

It’s still not clear who was behind the scam.

What can you do to prevent it from happening to you? Do the following:

1. Get to know your suppliers who speak English (if you don’t speak Chinese) and get your supplier’s landline phone numbers as that cannot be hacked. Call if you have any concerns.

2. Get your supplier’s bank account information in advance and ask them to refer to “bank account information document” on their invoices, rather than listing out full bank details every time.

3. Ask your suppliers to fax you their invoice and make sure the sending fax number belongs to your supplier’s company.

4. Do a first small wire to confirm the account.

5. Have a special procedure for confirming the company name. Note also “that paying a Chinese company in mainland China is safer for you” than paying them overseas, be it Hong Kong, Taiwan or anywhere else.

6. Have a special procedure for confirming bank account changes. “Follow the same procedure as point 5, but also call several people in the company. They will understand your attitude if you tell them you are worried about the “different bank account scam” — they are also a victim when it happens to their customers.

7. Have an internal procedure for confirming all payments over a certain amount.

 

China Work Injury Insurance: A Few New Rules

Posted in Legal News

China Work Injury Insurance

Late last month, China’s Ministry of Human Resources and Social Security (“MOHRSS”) implemented  Opinions on Several Issues Concerning the Implementation of the Regulation on Work Related Injury Insurance (II)(人力资源社会保障部关于执行《工伤保险条例》若干问题的意见(二))(the “Opinions”). The Opinions offer some (but as is fairly typical, not enough ) clarification on various current regulations. This post highlights a few key aspects of the Opinions.

The Opinions make clear that an employer who continues to employ someone who has reached his or her statutory retirement age (this age depends on the specific industry and position — the usual retirement age is 60 for male workers and 50 for female workers; however note that China is currently discussing increasing its ages for retirement) is responsible for providing work injury insurance for any such employee. In other words, even an employee who has reached the statutory retirement age suffers a work-related injury or occupational disease during employment and the employer has been contributing to work injury insurance on a project basis, the Regulation on Work Related Injury Insurance will apply. Though this only makes sense, this was formerly unclear.

The Opinions also state that the reasonable route an employee takes between his or her employer’s location and the employee’s residence for purposes of going to or from work will be considered “on the way to/from work” for purposes of the law and will not be covered by work injury insurance. This includes routes employees take when the employee works overtime.

An employee who suffers an injury while participating in an activity held by another entity and such activity is related to the employee’s work duties, it will be deemed to be work related injury.

If the employee is based out of town for work reasons and has a permanent address and a definitive work and rest schedule, for purposes of determining the employee’s work injury, the rules in the location where the employee is actually based shall be used.

An employer that does not operate from its place of registration usually  should contribute to the employee’s work injury insurance in the place where the employer is registered. For dispatched employees assigned to work in a location other than the place where the dispatch agency is registered, the dispatched employee’s social insurance must be paid in the place where the company that uses the employee is located.

Employers in the construction business that contribute to their workers’ social insurance on a project basis must get work injury insurance in the location of the construction project.

Bottom line: Regardless of where your employees are based, if you are a China employer, you must (and you should) contribute to social insurance for your employees. And depending on your location, you may also need to contribute to social insurance for your expat employees as well.

 

 

China Film Finance Event, April 21 in Beijing

Posted in China Film Industry, Events
China Film Event. Photo by Sina Daily News

           Photo by Sina Daily News

AmCham China’s Media & Entertainment Forum is putting on a what is sure to be a great event in Beijing on Thursday April 21st, from 5:30 p.m. to 7:00 p.m.: “China film finance — in conversation with Bennett Pozil of East West Bank.”

AmCham describes the event as follows:

China’s film business is growing at an astounding rate. The Chinese box office will eclipse North America’s in only a few years. Every week brings announcements of exciting new Sino-US film projects, investments and acquisitions.

However, Hollywood’s financing models are stretching to fit this new environment. Concerns about box office reporting abound. Completion bonds and insurances are just emerging. Collection account management also faces new challenges. As filmmakers and studio executives from around the globe converge for the Beijing International Film Festival, hear from a leading expert on Chinese film finance. Issues to be covered will include the following:

  • Financial structuring of Sino-US motion pictures
  • The roles of banks and lenders in the financing process
  • Tips for foreign producers or studios raising money from Chinese investors
  • Tips for successful co-productions
  • Collection account management in China
  • Completion guarantors and production insurers in China

Mathew Alderson, who heads up our China media and entertainment practice out of our Beijing office and is a co-chair of the AmCham Media and Entertainment Forum, will be the moderator.

Please go here to register.

Bennett Pozil is highly experienced in dealing with China film financing issues and if you’re going to be in town for the Beijing International Film Festival, you should get along to AmCham for this great event!

China Employer Rules and Regulations and Why You Must Have One

Posted in Basics of China Business Law, Legal News

hqdefaultAs I wrote in China Employment Contracts: If Yours Are Not Current, You Have A Problem, China employers must have written labor contracts with each of their full-time employees. Not having a written labor contract exposes employers to penalties (to their employees) administrative fines and the risk of being deemed to have entered an open-term labor contract with the employees lacking the contract. Most companies now understand this, but many do not realize that just a contract is not enough; every employer should have a set of rules and regulations as well.

The rules and regulations (规章制度) (sometimes referred to as an employee manual) is a long and complex document that sets out the full set of terms governing the employment relationship. One of the primary reasons employers need this document is because it provides the the grounds for terminating an employee.

Again, it’s important to note how China’s employment law system is very different from the system in the Unite States. In the U.S., employers can terminate employees pretty much at any time and pretty much any reason. This is called employment at will. China is not an at-will employment jurisdiction. All China employees must be engaged pursuant to a written labor contract and during the term of that contract, it is very difficult to terminate them. If an employer wants to terminate an employee before his or her employment term has ended, it can do so only for cause and cause must be clearly proven. For this reason, if you are a China employer, you should maintain careful discipline records so as to be able to establish grounds for dismissal.

The rules and regulations document should be detailed. Without this document, even if your employee does something terrible and harms your business, you will likely find yourself without a basis to discipline the employee (let alone terminate him ore her) unless your rules and regulations make clear that the employee’s actions were prohibited. One of our China lawyers loves to tell about a China case involving an employee who sued after being fired for stealing hundreds of thousands of dollars from his employer. The judge noted that the employee was a terrible person, but ruled that his employer could not fire him because there was nothing in the rules and regulations against stealing. I kid you not.

In some cities though, such as Shanghai, employers do not have to list every single punishable act in the rules and regulations to be able to discipline an employee. Shanghai is of the view that the principle of good faith governs during the employment relationship, so even though a certain act is not specified in the company rules and regulations as a punishable act, the employer may discipline or maybe even fire the employee who fails to act in good faith. But since many municipalities are not of a similar view and because even in Shanghai you are minimize your risks by being explicit, we generally put just about everything in the rules and regulations we draft for our clients.

But be careful what you put in your rules and regulations. Just because it is incorporated into the document does not make what is illegal permissible. If a provision is against the law and you relied on it in terminating your employee, your decision will be deemed to be unlawful termination. It is also a really good idea for you to review your rules and regulations document to ensure it remains in compliance with all applicable laws.

Oh, and one more key to a rules and regulations document. Put it in Chinese or you are at real risk of it being deemed unenforceable. We also like to see all employees sign something to prove they received it.

Bottom line: If you have China employees, you need a set of rules and regulations.

Worthless China Contracts: First, Let’s Sue All The American Lawyers

Posted in Basics of China Business Law, China Manufacturing, Internet, Legal News

China LawyersNo more Mr. Nice Guy.

In the last year or so, China has rapidly stepped up its technology game. It’s larger, better known companies (and many of its smaller and lesser known companies as well) are rapidly seeking to up their technology game. To put it bluntly, their first goal is to get high end technology from American and European and Australian (mostly) companies for free. Failing that, it’s to get that technology as cheaply as possible. We have written about this indirectly many times, most recently in China Technology Licensing Versus China Joint Ventures: Same Same, and in How To Give Away Your IP In China.

Okay, so what does all this have to do with the title of this post? Let me explain.

In the last few months alone, our China lawyers have been confronted with what feels like an endless stream of instances where American lawyers have essentially committed malpractice to the extreme detriment of their clients. I wrote about this (with much less of an emphasis on the lawyers who allowed it to happen, just a few weeks ago, in China and The Internet of Things and How to Destroy Your Own Company:

In describing IoT companies and their problems to others, I use the following as my prime example, taken from at least a half dozen real life examples in just the last few months:

IoT Company: We just completed our Kickstarter (sometimes Indiegogo) campaign and we totally killed it and so now we are ready to get serious about protecting our IP in China.

One of our China Lawyers: Great. Where are you right now with China?

IoT Company: We have been working with a great company in Shenzhen. Together we are working on wrapping up the product and it should be ready in a few months.

China Lawyer: Okay. Do you have any sort of agreement yet with this Chinese company regarding your IP or even costs or anything else.

IoT Company: No. All we have is an MOU (Memorandum of Understanding). They’ve really been great. They have told us that they would enter into a contract with us whenever we are ready.

China Lawyer: Can you please send us the MOU?

IoT Company: Sure.

China Lawyer: Okay, we will look at that and then get back to you with our thoughts.

Then, a day or two later we a conversation like the following ensues:

China Lawyer: We looked at your “MOU” and we have bad news for you. We think there is a very good chance a Chinese court would view that MOU as a contract. (For why we say this, check out Beware Of Being Burned By The China MOU/LOI) And the Chinese language portion of the MOU — which is all that a Chinese court will be considering — is quite different than the English language portion. The Chinese language portion says that any IP the two of you develop (the IoT company and the Chinese manufacturer) belongs to the Chinese company. So what we see is that as things now stand, there is a very good chance that the Chinese company owns your IP. This being the case, there is no point in our writing a Product Development Agreement that your Chinese manufacturer is not going to sign.

IoT Company: (And I swear we get this sort of response at least 90 percent of the time) I’m not worried. I think you have it wrong. I’m sure that they will sign such an agreement because we orally agreed on this before we even started the project.

China Lawyer: That’s fine, but I still think it makes sense for you to at least make sure that they will sign a new contract making clear that all of the IP associated with your product belongs to you, because if they won’t, there is no point in our drafting such a contract and, most importantly, there is no point in your paying us to do so.

So far not a single such IoT company has been able to come back to us with an agreement from their Chinese manufacturer to sign.

In that same post, I wrote of the following variation on the same theme:

We have lately been getting a slight variation on this theme, where the IoT company is farther along in its product development and is actually now at the point of selling its product. This newer situation is exemplified by the email below, which is an amalgamation of various emails received, all fairly recently, and with any and all kinds of modifiers to make it impossible for anyone to be able to guess the companies:

Here is my situation. I am hoping your firm can help us figure out the best course of action going forward. [Then usually follows a description of their company and their IoT product and how they ended up going with a particular Chinese manufacturer and why they failed to seek out the advice of a China lawyer until now. BTW, this description far too often involves their domestic attorney having told them that he or she would turn them over to a “China specialist” as soon as that “becomes necessary.”]

We do not have any contracts in place with our current manufacturer. We started the relationship with our current manufacturer a year ago. He told us that POs are contracts in China and our lawyer here confirmed that. We sent him our design, paid for the molds, and he shipped us the products. Recently, we found out that he used our product pictures as marketing material on Alibaba. We suspect he is selling our products all over the world. A week or so later, I found out that he has filed for a design patent for our design in China.

We just started the working relationship with [online retailer]. Our manufacturer doesn’t know that. All I told him is that we are working with a big client, and if he doesn’t sign any agreements with us at this point, we’re not going to place new orders. He then told me he’s willing to sign a non-disclosure agreement with us. But based on what he has done, I don’t think it is in his best interest to work with us in the long run.

We’re filing design patents in the US. If we continue to work with him during this period, which agreement would help us get the best protection?

Since he already claimed our designs in China, will that prevent us from working with a new manufacturer?

Do you advise we work with a new manufacturer at this point?

Our response has been something like the following:

A PO is not really a contract it is the placing of one order. Unless your PO speaks to IP (which would be very unusual), it almost certainly will not help us here. On top of this, some Chinese courts do not see POs as a contract at all and some Chinese courts will not even look at a document that is not in Chinese. The ideal is a Chinese language contract sealed by the Chinese company.

Our biggest concern is that this manufacture has gone off and filed for a design patent for your product. This will no doubt pose problems for you and for any new Chinese manufacturer you might seek to use. Depending on how far along your present manufacturer is in the patent process, it may be able to sue you and your Chinese manufacturer for damages and to force production to cease. At minimum, he will be able to cause you all sorts of problems unless you can stop or invalidate his design patent. At this point, there is a good chance that this Chinese manufacturer literally owns your product in China and he can use that ownership to control what you do there.

If you seek to go to a new manufacturer you can be sure of two things: one, your old manufacturer will NOT give you the molds you think you paid for and two, it will use its design patent to, at minimum, block your products from leaving China. It also very well may sue you for patent infringement in a Chinese court. In the meantime, making your product in China will be an extremely high risk proposition.

Based on the information you have provided us, it appears that you have four options, none of which are terribly good:

  1. You leave China entirely and you start manufacturing in some other country. Is this possible?
  2. You seek to block or invalidate your existing manufacturer’s design patent. This will not be accomplished quickly or inexpensively.
  3. You try to strike some sort of deal with your manufacturer whereby it assigns the patents to you and in return you agree to keep using it for manufacturing for x number of years. It may agree to this if what you can pay it will exceed what it can make by selling your product on its own. The fact that it has offered to sign a non disclosure agreement does not mean much at all, since such an agreement will not help you and your manufacturer almost certainly knows this. For why this is the case, check out Why Your NDA Does Not Work for China. You need him to sign a contract that actually makes clear what IP belongs to you and makes clear his limitations in using your IP. At this point, it sounds like you need a China-centric OEM Agreement.
  4. You go to a new manufacturer in China. If you do this, you almost certainly will not have your molds and there is a good chance your existing manufacturer will make a lot of trouble for you by suing or threatening the new manufacturer, etc.

IoT companies (and everyone else too): Don’t let the above happen to you. For more on how you can prevent this, go readChina NNN Agreements and China Product Development Agreements.

Now for the “suing all the lawyers” part. In most of these instances where the tech company has pretty much just relinquished its by far most valuable asset (the IP it took years to develop) to a Chinese company, the tech company was represented by an American lawyer. And in most of those instances — or so we have been told — the American lawyer told its tech client that it would be able to save it money by using their existing lawyer for “the basic agreements” and then using a “more specialized China lawyer” when necessary. But as you can see from the above, the American lawyers are too often guessing badly wrong on the “necessary” part of this equation. In fact, most of the time, it is the tech company, not its American lawyer, who finally makes the decision to call us, and that usually happens when the tech company starts sensing something is going wrong with its China situation.

So it is with regret that I am now going to start adding a fifth option to the four I list above:

5. Consult with your local malpractice lawyer about suing your lawyer who led you to believe he or she was qualified to assist you in dealing with China and then allowed you to get into the really bad situation in which you now find yourself.

Sorry.

Can China Innovate?

Posted in China Business

Can China Innovate

By Benjamin Shobert*

Over the last decade, I have found one of the most interesting questions to ask executives and policymakers about China is “can China innovate?” Biases come forth once the question is answered, both from those who tend to be over-optimistic about China, as well as those who are perennially bearish. Let the conversation unspool itself long enough, and you almost always find the group talking about deep culture, educational institutions, and hierarchy in China. Inevitably, the response lands on the role of government and its capability to actually incubate innovative industries.

Whether you agree with the idea that government in any form – whether autocratic or democratic – has a role fostering innovation, the Chinese government clearly believes it can be successful doing so. Admittedly, “success” as defined by the Chinese government on this topic is measured not purely by a conventional return on invested capital, but also through a number of intangibles such as political stability, moving the Chinese economy up the high-technology manufacturing curve, and what the “made in China” brand means to both domestic and foreign consumers.

The point often lost in discussions about whether or not China can innovate is that when China brings its attention to a particular innovative sector, it disrupts where R&D takes place, it creates a new geographic locale where commercialization can be attempted, and it sets in motion a host of policies that complicate everything from market access to global trade accords. The best example of this in recent memory would be clean-technology; however, the culmination of a nearly two year long research project at the Seattle and Washington DC based think tank the National Bureau of Asian Research (NBR) shows that the life science sector could also face similar disruptions.

In fairness, our research also showed that many of the structural challenges that inhibit higher quality bench science activities in China specific to life sciences remain chronic. Xiaoru Fei and Joseph Wong, who contributed a significant part of our final research project note, “technology transfer among China’s universities equals less than 10% the rate of foreign universities. In general, Chinese universities are not lacking in star scientists who publish in first-rate academic journals; however, they do lag significantly in technology transfer.”  (page 10) This will come as no surprise for those familiar with the unique fixation Chinese academic institutions have on publishing papers as the primary metric that ensures promotion.

The life science sector needs a unique ecosystem to succeed. Other national economies have struggled to achieve their own success in similar pursuits, in large part because they equated investment capital and infrastructure with successful outcomes.  The painful reality is that success in the life sciences requires strong investment in more than just infrastructure coupled to a long time horizon. China’s various life science incubator parks around the country are, like so much that defines China today, bright, shiny and new. They are also under-utilized, in part because they lack the type of robust connections to academic institutions, access to a transparent and scientifically robust CFDA approval process, an immature venture capital sector, and perhaps most critically, a chronically under-funded domestic drug reimbursement scheme that would reward innovation.

China’s attention on the life science sector may prove fleeting: China’s party cadres are initially motivated to follow through on the central government’s policies especially when these policies require digging holes and pouring concrete. This is why so much has been made of all the new biotech park capacity that has sprouted up across the country. But, the mid-term attention span of these same party cadres evaporates if the sectors in question do not become tax-paying entities. When you have both, the provincial and municipal governments will pay particular attention to fostering the sector in question. Life sciences does not map onto this objective as cleanly as other sectors such as telecom or clean-technology. The payoff for investments in bench science for biotech is much longer, and the risk to reward ratio is much greater than other industries that have a more obvious manufacturing component where China’s top-down approach has proven to be both disruptive and successful.

The challenge in all of this is to recognize that our politicians and policy makers are not always as adept as their counterparts in business when it comes to thinking about China. Yes, China’s pursuit of a domestic life science industry constitutes a threat to some established interests, but only if this sector’s needs in the US are neglected and key reforms required here are allowed to go unaddressed. As I write towards the end of my section in the analysis, “The United States’ current political environment for economic planning struggles to adapt to the realities of the globalized world that the country’s businesses and entrepreneurs must compete within, which contrast sharply with how politicians wish the world would be….Rather than look for the ways in which the Chinese model of fostering innovation may have lessons for U.S. policymakers, the current political climate in the United States has made recrimination the path of least resistance.”

High technology sectors such as the life sciences are only marginally safer from Chinese competition than other parts of the global economy where China has proven to be a disruptive force, for both good and bad.  As western businesses rightfully chase the market opportunity in China, so too must western politicians and policymakers aggressively develop and implement policies design to ensure their domestic markets remain competitive as the globalized world begins to level yet another playing field western stakeholders had long assumed was safe from competition.

* Ben is my go-to person on big issues relating to China health care and life sciences and when I saw that he had just completed his work on a two year in the making report on China’s life sciences sector, I asked him to write something on that report for us. He graciously agreed. When not writing deep-think life sciences reports, Ben engages in health care consulting through Rubicon Strategy and writes on Asia health care for Health Intel Asia.

Chinese Tourists and China-Japan Relations

Posted in China Travel

Chinese Tourists

I just this weekend returned from a one week Tokyo bizcation (business and pleasure), where I got my fill of great food, great temples, great cherry blossoms and Chinese tourists. But rather than me go off and tell you what I saw of the Chinese tourists, I will instead discuss how the Japanese are reacting to them, starting with this article from The Nanfang entitled Chinese Tourists Rampage Through Japan’s Cherry Blossoms.

This article talks about how Japanese are so angry with the behavior of (some) Chinese tourists that they are calling for “Chinese only zones” to minimize the damage and the disruptions they cause. For two reasons, I find this horrible and incredibly sad. First, it reminds me of how badly the United States treated the Chinese who came to the United States in the 1800s and the early 1900s. Calling for Chinese only zones harkens back to those days as it is discriminatory to the extreme. No matter how bad Chinese tourists may act, I would never condone segregating them. Second, I find it sad and horrible that it has come to this.

But even with my very limited dealings with Japanese while I was there, I heard more than once their views on the Chinese tourists in their midst. Our hotel concierge urged that we go to Ueno Park “before 10 a.m. because the Chinese start to come after that and ruin it for everybody else.” When I looked at her somewhat stunned, she proceeded to apologize profusely for their behavior and said that “everyone is hoping that they will not be allowed to come during cherry blossom season next year. It would be better.” A Japanese lawyer told me pretty much the same thing and of how “much better the cherry blossom season was before the Chinese started coming.” He then went on a diatribe about how they do not “really appreciate beauty but just come to say that they were here and because they are still really mad at us.” I did not bother to ask why they would come to Japan because they are mad, because the whole conversation made me too uncomfortable and I feared it would only get worse.

Japan has to be one of the most orderly, law abiding, safety conscious nations in the world. Nobody jay walks. Nobody cuts in line. Nobody steals. Nobody speaks so loudly as to bother others. Pretty much everyone is helpful and respectful. It is flat out amazing in these regards. Not surprisingly, it expects similar behavior from others.

Japan does not hesitate to discriminate. Pretty much every single time I have left Japan via air, including this time, I am taken out for a “random” search, along with pretty much every non-Japanese male over 5’8″ tall. Come on. So is it possible that Japan will block Chinese tourists for a few weeks during next year’s cherry season? I highly doubt it. But I could see them start steering Chinese tourists to certain parks/places at certain times, while alerting non-Chinese that is what is happening. For all I know, that is happening already, hence the concierge’s advice to get there before ten. This too would be very sad.

What can and should be done about this, beyond just adding more names to China’s cannot leave list? What are your thoughts? Is this just a China problem or is this happening because of globalization and the Chinese are unfairly getting tarnished with one big brush that should include others? Is this a case of unfairly imposing one country’s values on another? Do you find all of this as sad as I do? hese are some really tough times for globalization and no country is immune to this. Is this a Japan problem or a China problem or a problem of both countries or the entire world?

Serious and respectful comments are welcome.