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China Arbitration and Litigation, Part 2: First Check Your Insurance Policy

Posted in China Business, Legal News, Litigation and Arbitration
Looking at being a plaintiff or a defendant in an international litigation or arbitration matter? Check your insurance policy

Facing international litigation or arbitration? Check your insurance policy.  (http://bit.ly/1MbAr8b)

If I were to list out the most common litigation-inducing problems our China lawyers have seen in the last few years, that list would consist of the following:

  1. Bad product received from a China manufacturer
  2. Late product received from a China manufacturer
  3. No product received from a China manufacturer
  4. An investment into a China company or project that never existed
  5. The China Bank switch scam
  6. IP theft (trademark, copyright, patent or trade secret)
  7. Failure to get paid by a Chinese company
  8. The reverse of some of the above. In other words the American/European/Australian company is being accused of having provided bad product, failing to pay, or having engaged in fraud or IP theft.

Because litigating and arbitrating against Chinese companies is rife with so many issues specific to China and to Chinese companies, we have begun an indefinite series on China Litigation and Arbitration. If you have any questions regarding litigating or arbitrating against Chinese companies, please leave them as a comment below or please email us and we will try to incorporate answers in future posts within this dispute resolution series. Part 1 of this series, China Litigation and Arbitration: What we are seeing, provides a very general overview of current trends in China litigation and China arbitration.

The first thing my firm’s international litigators usually do when they get an international litigation or international arbitration matter involving one of the above (or really any international arbitration or international litigation matter) is ask for a copy of our client’s insurance policies. After reviewing the policies, we typically predict one of following three results, fairly evenly spread out:

  1. The insurance company(s) likely will pay our client the full amount of coverage (or close to it) without much dispute.
  2. The insurance company(s) may or may not pay our client the full amount of coverage without much dispute, but if there is a dispute, it will likely be worth our client fighting over coverage because it is likely to secure full coverage or at least enough to warrant the fight.
  3. The insurance company(s) is not likely to provide any coverage (beyond maybe a very minimal amount) and it probably will not be worth it to our client to spend much money or time litigating the insurance coverage.

But here is the important thing: the insurance policies we see are all over the map on just about everything.

By way of one example, many policies have almost afterthought provisions on cyberfraud or computer hacking. The main part of the insurance policy may clearly provide that there will be no coverage for fraud, and yet there will be a provision stating that the policy will cover “computer fraud” up to x dollars per incident. The x dollars is overtimes a very small amount, but because the law is unclear both as to what constitutes “computer fraud” and as to what constitutes an incident, we have used this provision to drive a truck through on behalf of companies we represent on China bank switch scam cases. We argue that because the fraud was induced via a hacked email, it comes within the coverage exceptions provided for either (or both) cyberfraud and computer hacking. We then argue that each payment made by our client (and oftentimes in these fake bank frauds there have been multiple payments) constitutes a separate incident. Let’s just say that insurance companies usually prefer settling to litigating a case that might establish new and unfavorable law on one of their own policies. This is especially true in the more friendly policyholder states.

I wrote on this previously in Cheated By China. Check Your Insurance:

This insurance coverage lawyer told me that he is building up a cottage industry representing companies that have been hit with this scam. He said that he alone has taken on about a half dozen of these matters in just the last six months. And if he has taken on about a half dozen of these, that almost certainly means that he has reviewed about a dozen. What he is doing is going to the insurance company of the company that has been scammed and demanding it reimburse his client for the money his client lost. This lawyer tells me that the insurance company’s initial reaction is to essentially call his client an idiot, but as I pointed out, even if true (and I vehemently deny that it is), I have yet to see an insurance policy with an “idiot exclusion.” This lawyer then convinces the insurance company that what happened is plain and simple employee negligence and that the insurance company must provide coverage.

The same can hold true for companies that order a product from China that never comes. There is a an argument to be made that this is fraud and that this is theft and since many policies provide some coverage for fraud and many provide a lot of coverage for theft, it usually behooves us to make an insurance claim on behalf of those companies that ordered product from China and never got anything but a runaround. The same holds true for companies that send product to China or provide a service for a Chinese company and never get paid. They can argue that they are victims of a fraud or a theft. These are not simple arguments, however, as they usually involve inherently inconsistent provisions within the insurance policy contract. An insurance policy may provide coverage for theft on the one hand while excluding breach of contract damages on the other.

Some general business insurance policies — typically called a Commercial General Liability (CGL) insurance policy — may provide a little (or even sometimes a lot) of coverage if your intellectual property (be it your trademark, your patent, your copyright or even your trade secret) gets stolen in China or anywhere else. Beyond that some companies purchase IP protection policies that provide specific protection against IP theft. More common is to have advertising coverage in your standard business insurance policy that will oftentimes provide you with insurance coverage in a dispute involving allegations that you are using someone else’s intellectual property.

Bottom Line: Massive books have been written on insurance coverage. Indeed, massive books have been written on insurance coverage for specific losses like fraud or intellectual property theft. So there is no way a blog post can do anything but touch on the issues. And that is the point of this post. Just to put into your head that you have been paying insurance premiums for years just so that it will be there when you suffer a loss or get sued. So next time you are looking at litigating or arbitrating against a Chinese company or your company is facing a lawsuit or an arbitration for something it is alleged to have done in China or involving China, have your lawyer check your insurance policy for coverage. Because unless you have that done, you just never know.

China Litigation and Arbitration: What we are seeing

Posted in Legal News
The above always holds true, but sometimes litigating or arbitrating is the best option.

But sometimes litigating/arbitrating IS your best option.

Had a nice conversation yesterday with a bunch of my firm’s China lawyers and litigators, mostly on what is causing the increase in litigation and arbitration against Chinese companies and about some of the pitfalls peculiar to suing Chinese companies. The impetus for this discussion was my having signed on to speak (twice) about how to avoid litigation against Chinese and how to deal with litigation and arbitration against Chinese companies if it occurs.

Because litigating and arbitrating against Chinese companies is rife with so many issues specific to China and to Chinese companies, I am going to make this the first post in an indefinite series on China Litigation and Arbitration. If you have any questions regarding litigating or arbitrating against Chinese companies, please leave them as a comment below or please email us and we will try to incorporate answers in future posts within this dispute resolution series.

My first litigation related talk is going to be at the Los Angeles Athletic Club (in Los Angeles) on February 25 at 3:15 and though entitled, Manufacturing in China/Asia: Keep Your Eyes Wide Open, its focus is going to be almost exclusively on preventing and handling litigation with Chinese companies. Its “official” bullet points are as follows:

  • How to source products from China and other emerging Asian economies
  • How to source products so as to avoid product liability lawsuits
  • How to prevail in litigation against your Asian manufacturer
  • Cross-claiming against your Asian manufacturer

Immediately following my speech I will be participating on a stellar panel discussing “Claims and Coverage Involving Foreign Products.” For more information regarding this seminar, go here. And to secure a really good discount to this event, please contact me at my firm directly. My next China litigation talk will be in Chicago in May and I will provide more information on that shortly.

In the meantime though, back to why we are seeing such a rapid increase in litigation and arbitration involving Chinese companies. Why is this occurring? We see two obvious reasons for this increase. First, the mere fact that the relationship between so many US and Chinese companies has become more mature. Ten years ago, Chinese companies didn’t want to rock the boat by suing American and European companies and American and European companies believed (generally rightly) that many of their Chinese counterparts did not have sufficient assets to pay any judgment anyway. On top of this, the contracts between the Chinese companies and their Western counterparts were so often so poorly drafted as to make prevailing on a lawsuit a crapshoot.

In the last few years, however, as both Western and Chinese companies want good international contracts to protect themselves, the risks of litigating (though always present) have declined. On top of this, many Chinese companies have become more financially stable and some of them now even have assets outside China.

The second reason for the recent uptick in litigation and arbitration involving Chinese companies is the economic downturn in China. Companies that are making money hand over fist on their core business often view litigating or arbitrating as a time-sucking nuisance that can impede their growth trajectory. But companies with economic problems are often more open to pursuing new ways (like litigation and arbitration) to acquire funds.

Quick Question Friday, China Law Answers, Part XII

Posted in Basics of China Business Law, China Business, Legal News
How can I get my money out of China without paying taxes on it?

How can I get my money out of China without paying taxes on it?

Because of this blog, our China lawyers get a fairly steady stream of China law questions from readers, mostly via emails but occasionally via blog comments or phone calls as well. If we were to conduct research on all the questions we get asked and then comprehensively answer them, we would become overwhelmed. So what we usually do is provide a super fast general answer and, when it is easy to do so, a link or two to a blog post that provides some additional guidance. We figure we might as well post some of these on here as well. On Fridays, like today.

The following question tends to come to us by phone and is never from our existing clients:

Question: I have _____ dollars of cash in my apartment in China. Can you tell me how to get it to the United States/Canada/Australia/Europe without having to pay taxes on it?

Answer: No.

Come on. Did you really think that a lawyer is going to engage in criminal tax fraud with you. What is amazing about these callers is that at least half the time after one of our China lawyers makes clear that we are not going to help them, they tell us of their plan and ask what we think of it. Our response is that is illegal and you could end up in jail either in China or in the country in which you live (for bringing money into a country multiple times to try to get around the incoming country’s money reporting laws)  if you try that.

Usually their plan consists of taking the money back to their home country in chunks just small enough to avoid the money reporting laws of their home country. Sometimes the plan involves taking the money to Hong Kong. Sometimes it involves giving the money to someone shady to take it out for them and put it in a bank account in some other country and sometimes (but we also get plenty of calls from people wanting to sue when the courier keeps all of the money) the courier actually returns some small portion of the money.

Our advice: pay your taxes as you go along and then taking out your money out of China ought to be relatively easy, at least until recently. See Getting Money Out of China: What The Heck is Happening?

 

Copyright Takedowns in China, Part IV: Whatever you do, register your copyrights first

Posted in Basics of China Business Law, China Film Industry
This definitely holds true for China copyrights takedowns.

This definitely holds true for China copyright takedowns.

 

This is the fourth in a series about online copyright takedowns. Copyright Takedowns in China was a general summary of the regulations that establish the takedown procedures. These regulations enable enforcement of the “right of communication through an information network” as it applies to sound recordings and audiovisual recordings. Copyright Takedowns in China Part II: Searching, Linking or Storing? looked at how providers of storage space encounter more liabilities than those merely providing searching or linking services. The application of the takedown regulations to cloud service providers was covered in Copyright Takedowns in China Part III: Audiovisual and Sound Recordings in the Cloud.

Our China lawyers are handling more and more takedown work these days and one thing is very clear: if you ever expect to have infringing content taken down the single most important thing you should do is register your copyright in China in advance. The reason for this is simple. If you attempt to invoke China’s notice and takedown system the internet service provider will put you to proof. If you don’t have a Chinese copyright registration certificate ready to go you will need to prove your copyright ownership. Though Chinese network service providers all have their own requirements for this, all of them will require you to provide a bunch of chain of title documents that have been translated into Chinese. These documents will be essentially the same as those required to obtain a registration anyway. Once you have proven your ownership to a network service provider, you will have nothing to show for all the work, except, we would hope, the taking down of the infringing content in one instance. You will need to repeat the exercise again and again if numerous sites are involved or if your content goes back up again on a site from which it was taken down.

So speed up the takedown process, and have something to show for your work, by registering your copyrights in China. If you have your chain of title ducks in a row it will be quick and inexpensive to get a registration. You will then be ready to strike.

China Law Blog Commenting Policies

Posted in Recommended Reading
Nothing is written in stone.

            Rule No. 1. Nothing is written in stone.

Not sure why, but we have gotten a rash of questions lately from readers wanting to know our policy on comments. Let me start by saying that we do not really have a formal policy and that much depends on who is monitoring the comments on any particular day. I guess if I had to sum it up, we strive not to be arbitrary and capricious.

But if we were to be forced to analyze our commenting policies in writing, I suspect it would look a lot like the below (in parts borrowed heavily from multiple other sites):

We strongly encourage you to comment on our posts as we very much want to be an open forum for discussion and debate. We do expect you to keep the discussion civil and we generally do enforce the following basic rules.

  1. No hate speech.
  2. No selling anything.
  3. No spam. 99 times out of 100, if you give a “selling link” we will delete it even if we keep the rest of your comment.
  4. No slamming anyone by name unless for something someone said. In other words, if you say that so and so owes you $50,000 and is a deadbeat, we delete it. If you say that such and such Chinese company gave you bad product, we delete that. We just don’t think it fair to allow one side in a dispute to provide their facts on our blog.
  5. There are a few people we find so terminally obnoxious or dishonest that we have banned them permanently for this reason and when they post comments under fake names (yes we can usually tell) we delete those also, oftentimes just because we feel like it.
  6. We sometimes (and trust us when we say we hate this) will “modify” or even delete a comment if we believe it could lead us being taken down in a particular country (one guess) that does that from time to time with websites it does not like. This is very rarely done, but sadly, it is every once in a while necessary. Our view is that it is more important to keep that channel open than to have it be closed and we have heard from a large number of people, especially Chinese lawyers who have expressed this same opinion about our blog to us.

We never delete a comment just because we disagree with it or do not like it. Dissenting opinions are not only welcome, they are very much appreciated as they enliven the discussion. It pains us at times to post comments when we know the advice given in them is wrong, but we post those as well, both here and on our China Law Blog Linkedin Group (please consider joining as it’s great!). We long ago decided that our readers are adults capable of making their own decisions.

As you have no doubt noticed, we utilize Disqus for our commenting system and we do this for the following reasons:

  1. It just works. It makes discussions easy to follow and to share.
  2. It puts Disqus in charge of maintaining user information.
  3. Disqus has a good spam filter.

We hold ALL comments for moderation and so there is no need for you to post your comments twice (or eight times either) and unless it has been longer than 24 hours since you posted your comment, there is also no need for you to write us accusing us of having censored your comment. We review all comments before they go live and we generally do this only 1-3 times per day. the comments two or three times per day. What this means is your comment might sit for a couple hours before I can review it. Your patience is appreciated.

We seldom comment ourselves or respond to individual comments simply because we don’t have the time. We also think it best to let our readers control the discussion.

Above all else, please always feel free to contact us with any concerns or suggestions.

China Employment Laws: Dealing With Pregnant and Nursing Employees

Posted in Basics of China Business Law, Legal News

 

China Employment laws Now that China has amended its Law on Population and Family Planning, it is a good time to review how China’s employment laws treat pregnant and nursing employees. As I wrote previously, Chinese labor law generally takes a pro-employee position regarding such employees.

The first thing you as an employer in China must keep in mind when dealing with a pregnant or nursing employee is that you are prohibited from unilaterally such an employee without cause. This means you cannot terminate the employee by giving thirty days written notice or by paying an additional one month of the employee’s salary even if you could ordinarily have done so under the permissible grounds for unilateral termination, nor can you terminate the labor contract of the employee by initiating a mass layoff.

This, however, does not mean you are absolutely prohibited from terminating a pregnant or nursing employee. Termination is still possible under one of the following circumstances:

  • The employee does not satisfy the conditions for employment during the probation period.
  • The employee materially breaches the employer’s rules and regulations.
  • The employee commits a serious dereliction of duty or practices graft, causing substantial damage to the employer.
  • The employee has established an employment relationship with another employer that materially impacts completion of her tasks with her existing employer, or she refuses to terminate her employment relationship with the other employer after being required to do so by her existing employer.
  • The employee uses deception or coercion, or takes advantage of the employer’s difficulties, to cause the employer to conclude the labor contract, or to make an amendment thereto, that is contrary to the employer’s true intent.
  • The employee has criminal liability imposed against her.

In addition to the above, the employer may also terminate the labor contract by reaching a settlement agreement with the employee. It could get messy if the employee claimed she did not know about her pregnancy until after her labor contract was terminated. The employee might go back to the employer seeking to revoke her earlier decision because it was made due to a “serious misunderstanding.” Unfortunately, for China employers, the court decisions on this issue are contradictory, with some holding against employers (and reinstating the employee’s positions) and some holding in favor of them.

Moreover, Chinese employment law requires that when the term of a labor contract with an employee expires while the employee is pregnant, the contract must be extended until the employee is done nursing. Consider this question: what if a pregnant or nursing employees refuses to enter into a new written contract after her existing one has expired? Can the employer end its relationship with that employee?  The answer is somewhat unclear. Some Chinese courts have held that an employer that acted in good faith and the employee refused to sign the contract without justification, the employer has the right to end the labor relationship. But a second view insists on strictly applying the Labor Contract Law and requiring the labor contract be extended even if the pregnant or nursing employee refuses to execute a written labor contract with the employer. The employer should proceed with caution, because letting an employee continue working after the initial labor contract expires may lead to employer penalty (for not having a written labor contract with the employee).

Bottom line: If you are an employer in China, start studying China’s laws on pregnant and nursing employees so that you know them before you need them.

Chops For China, Sorry But No

Posted in Basics of China Business Law, Legal News

 

Don't ask a lawyer to shut your barn door after all the animals have left.

Don’t ask a lawyer to shut your barn door after all the animals have left.

 

One of our China lawyers attended a Continuing Legal Education Seminar (CLE) last week to pick up needed credits before the bar fines start setting in. The seminar was on Law Firm Management for the 21st Century (or something like that) and one of the things discussed there was how it is our job as lawyers to discern what it is our clients actually need and then instruct them on that. In other words, clients oftentimes think they need A when in reality they need B.

This is all so true. And in deleting old emails this past weekend, I came across countless examples where this was the case, but my favorite ones are always those where someone writes us (and I apologize in advance for making this post so heavy with bad analogies but I’m in the Midwest United States right now and that just always seems to get me in an analogy mood) very calmly and knowingly asking us for a band-aid without realizing that they have already lost both arms and legs.

The below is a composite of a couple of those, with the email from the potential client and my dream response:

We’re an Australian company and we’ve just been asked by a vendor in China to provide our chop to be added to our contract. Is this something you can help us acquire?

Thanks

My responses (modified slightly for blog purposes) were essentially as follows:

Sorry but no and the reason for saying no is somewhat complicated, but I feel compelled to explain.

Asking us as a law firm for help in getting a chop is the equivalent of giving us a twenty-page contract and asking us to sign it without looking at it. If we sign it (or give you the chop) our law firm is tied in with the contract and no law firm would permit that. No exaggeration, but nearly all of the contracts we see between American companies and Chinese companies do not protect the American company at all. This is because these contracts were either drafted by the Chinese side, which knows exactly how to draft a contracts that leave their US counter-parties out in the cold, or by an American lawyer unfamiliar with Chinese law. For just one example of where domestic lawyers so often go badly wrong on these contracts, check out number two in this post on China mistakes to avoid.

If you want a non-legal analogy, think shutting the barn door after all of the animals have left.

I gave a quick look at your website and I see that you provide services. This is a particularly risky arena for us because service companies are constantly not getting paid by the Chinese companies for which they perform the service, either because the Chinese company chooses not to pay or because (and this is happening constantly these days) the Bank of China itself chooses not to pay. For more on both of these things, I urge you to read the following:

Without knowing what you have done so far, I cannot give you any specific advice beyond that you take real stock of where you are right now as compared to where you should be.

Bottom Line: Don’t wait until the last minute to reach out to a lawyer for help.

 

China Tax Audits: The Day The Music Died

Posted in China Business, Legal News

The China times they are a-changin

Come gather ’round people
Wherever you roam
And admit that the waters
Around you have grown
And accept it that soon
You’ll be drenched to the bone
If your time to you is worth savin’
Then you better start swimmin’
or you’ll sink like a stone
For the times they are a-changin’

Things are changing for foreign companies doing business in China.

A lot.

Take taxes. Yes, we are always writing about how China has begun cracking down on foreign companies that have China-based employees without a China company (see this Forbes Magazine article, China’s Tax Authorities Want You) and also how China has caught the transfer pricing bug (see this Forbes Magazine article, China’s Tax Authorities Want You, Part 2). But what I am talking about below is different than these two things.

Very different.

Please forgive me for having to be less than direct in this post but those who are familiar with China’s Internet, more particularly, with how it can sometimes be difficult to stay “on the air” on China’s Internet ought to fully understand.

What has been happening of late is really interesting and until I spoke with a leading China reporter who is doing a story on something similar, I did not understand what was happening. I will explain by first telling you what exactly it is that we have been seeing.

Over the last ten years our China lawyers have received probably tens of thousands of calls and emails from foreign companies (mostly North American, European and Australian) companies doing business in China. During these ten years, we have seen many changes in China, some of which come and go and then return again. The closing down of foreign businesses in China for not having a WFOE is one of those (btw, this one is back with a vengeance and we will be writing on that very shortly). But this one is brand new for us I am pretty sure. This one is something we have received five calls on in the last three months or so and I do not recall us ever having received such a call in the previous ten years. Here is the situation prompting the call:

Foreign company operating “legally” in China, or at least legally to the extent that it has a WFOE there, calls us because it is in the midst of a China tax audit. Now to set the stage here, we are a law firm that focuses on helping foreign companies navigate Chinese legal issues; we are not an accounting firm. So when we get China tax calls, they are usually not for help with the basics, but rather when someone realizes that they are in serious legal trouble in China arising usually from a Chinese government accusation regarding a failure to pay taxes. Here is a composite of the recent calls we have been getting:

I am at home in [fill in the blank here with an English language speaking country] and I am not sure whether to go back to China. My company is in the middle of being audited and we are being questioned regarding fake Fapiao. My accountant convinced me that everyone in China uses fake Fapiao and I went along with this. What should I do.

Now a bit more stage setting. In every single instance of the above (but one), the company calling us has never spoken with anyone in our law firm previously, much less retained us as their China attorneys. No, they are calling us totally out of the blue. IN the one case where we spoke previously, I had in my notes that this person “chose not to use us because I made very clear we would not be willing to cut legal corners.” Now to be fair to the recent callers, about half said that they didn’t know that their WFOE had been using fake Fapiaos. And to be fair to the “accountants” mentioned in the call, my pressing in every case revealed that what the callers were talking about was someone more on the level of a bookkeeper in their own company.

Let’s talk for a minute about fake Fapiaos. At their most basic, a Fapiao is an official receipt that allows a Chinese company, such as a WFOE, to take a deduction for an expense. Fake Fapiaos are rampant in China and it is true that a number of companies use them to reduce the amount they need to pay in China taxes. The below comment (left on our blog post, On Being a China Lawyer and on Doing Business in China) describes the prevalence of this practice:

Great interview. You said, “Americans need to start realizing that what American companies got away with five years ago, that era is no more. And the things Chinese companies down the street are getting away with? Well, you’re not a Chinese company.” My consulting company works hard to operate legally in China and we end up paying a lot of taxes. Periodically our our Chinese accounting firm warns us that we will be making a profit and should turn in more FaPiaos (official receipts) or else be taxed. Our General Manager, who is Chinese, tells me that most companies (>80%) try to not show profits in China and practice illegal accounting tactics and bribes to get around paying taxes. It can really bother me at times but it is a reality we must accept. I am comforted at the end of the day knowing that whatever other companies might do, I can sleep with a clear conscience and can stand behind our accounting practices.

Okay, but now, all of a sudden, foreign company after foreign company is being hit with the reality of Chinese tax authorities being unwilling to look the other way. Why is this happening? I think it is because the Chinese tax authorities that might in the past have been happy to look the other way in return for receipt of their own rewards (perhaps from the so-called “accountants” who had allegedly advocated for using fake Fapiaos) have recalculated the risk to reward ratio of doing so and have chosen to fly straight. In other words, what was okay (for a price) in the recent past is no longer okay now.

Like I said, things are really changing in China. But you tell us, are you seeing these things too?

 

 

Quick Question Friday, China Law Answers, Part XI

Posted in Basics of China Business Law
Who should sign my China contract?

How should the Chinese company sign my China contract?

Because of this blog, our China lawyers get a fairly steady stream of China law questions from readers, mostly via emails but occasionally via blog comments as well. If we were to conduct research on all the questions we get asked and then comprehensively answer them, we would become overwhelmed. So what we usually do is provide a super fast general answer and, when it is easy to do so, a link or two to a blog post that may provide some additional guidance. We figure we might as well post some of these on here as well. On Fridays, like today.

But this next question did not come from a reader and so the beauty of it is that it also comes with a ready answer provided by one of our China attorneys and cc’ed to me pretty much already blog-ready. The question is how should a massive Chinese SOE [called China SOE below] sign various documents relating to a large product sale and the below was the “quick” answer:

Note that the SOE stamped the NNN but did not sign it. Though a stamp is legally sufficient, you should require the normal execution formality: the name of the person signing, his or her title with the company, and the company seal. Of the three, the company seal is the most important. In an SOE, a document that is not stamped with the company seal has little meaning. However, it is acceptable if the seal used is a dedicated contract seal. But in that case, a signature and the title become even more important.

Contract signing issues come up all the time and not just with SOEs. For more on China contract signing formalities, check out the following:

On Being a China Lawyer and on Doing Business In China: An Interview, Part 2

Posted in Good People, Legal News
On being a China lawyer and on doing business in China

On being a China lawyer and on doing business in China

I was interviewed last year by Jason Aquino of Scouts Consulting as part of an ongoing interview series on strategy and innovation in business, sports, and national security. Jason will be releasing this series of interviews in the future, but in the meantime he is allowing me to publish mine here, mostly after I begged him to be able to do so because I liked it so much.

The first part of my interview dealt mostly with the legal industry and the second part dealt mostly with being a China lawyer. I flipped the two around and provided the China portion the day before yesterday and the legal industry portion today.

 

Dan Harris is the founder of Harris Moure, an international law firm with offices in Seattle, Portland, and Beijing. He represents and seeks to protect companies doing business in China and other emerging economies in Asia. His work has been as varied as securing the release of two improperly held helicopters in Papua New Guinea, overseeing dozens of litigation and arbitration matters in Korea, helping someone avoid terrorism charges in Japan, and seizing fish product in China to collect on a debt.

Dan and colleague Steve Dickinson co-author the China Law Blog, which discusses the practical aspects of Chinese law and how it impacts foreign companies doing business there. China Law Blog has been a mainstay of ABA Journal’s Blawg top 100 law blogs, and in 2013 was named to the Blawg 100 Hall of Fame. It is an indispensable resource for lawyers and companies seeking to do business in or around China. Dan’s perspectives on international legal issues have appeared in such publications and media outlets as The Wall Street Journal, Forbes, Fortune, Business Week, The Economist, The New York Times, The Washington Post, CNBC, and BBC News.  

Last April Dan was a keynote speaker at the Oregon Law Review Symposium on Disruptive Innovation in Law and Technology, where he discussed how lawyers could better position themselves in the evolving legal marketplace. He talked about the aversion many lawyers have to marketing, as well as the need for lawyers to become more business-minded, which legal training traditionally hasn’t encouraged. You can find Dan’s paper from the symposium here (p. 881).

 

What are some of the barriers to innovation in the legal industry that you see today? 

One of the common barriers is that most lawyers charge by the hour, which takes away incentives to innovate and become more efficient. Another barrier is the fact that so many law firms are run by 60-year olds.

Not that I have anything against 60-year-olds, but innovation oftentimes comes from people who look at industries in a new way. And young lawyers generally do not have much power in the legal industry.

But don’t law schools recruit students from a diversity of backgrounds? Doesn’t that help bring in new ways of looking at the profession?

That’s actually another problem with the legal industry. You can have a diversity of backgrounds, but law school pounds that out of its students, training all of its students to be incredibly conservative and risk averse.

And it makes sense: a lawyer’s job is to point out risks and help ameliorate them. But what that also creates is a personality that is afraid. Too many lawyers are naysayers.

I can give any business starting out 20 reasons why it is going to fail. But the trick to what I see as the good lawyers’s job is not discourage the client by doing nothing but pointing out the risks, but to help the client surmount potential problems. So many lawyers come up with the 20 reasons for themselves (or for their firm) and view them as reasons not to push forward, not to take risks, not to innovate, not to risk failure.

Is it fair to say that clients moving legal work in-house is a big problem facing law firms today?

There are a lot of reasons why so many law firms are struggling today. That is just one of them. Another is that they’re not really in sync with their clients. Their clients are focusing on business issues. Too many lawyers don’t think the same way as their clients, and that frustrates clients.

You would be shocked (or maybe you wouldn’t) at how many times companies choose our firm over two or three others simply because we were the only one willing to quote them a fixed fee rate on a project. These companies tell me that the other firms insisted that they had no way to know what the project would cost. If a law firm drafts a China manufacturing contract 3-5 times a month (as mine does), how can it not know how long it will take? In the early days when my firm was offering flat fees, some of the lawyers in my firm would try to make the same excuse for being unwilling to come up with a flat fee amount. My response to them was to “get over it and start thinking of yourself as a plumber and now imagine how pissed off you would be if your plumber told you he or she had “no idea” how long a relatively simple project was going to take.

And here’s the thing: take something like writing a manufacturing contract. Ninety percent of those that we take on come within a two to three hour range of each other, with maybe ten percent taking a bit more or less time. It is not as though one will take five hours and another will take twenty hours. And why can’t a law firm doing 50+ China manufacturing contracts a year take on the risk that it might be underpaid just a bit on a few of them? There are two answers to this. The law firm is actually not very experienced with such contracts or it is way too risk-averse.

Then there is the reputation lawyers have for being deal killers. The old saying among businesses is that lawyers always say no. There’s some validity to that. Lawyers must change in the same ways their clients are changing.

I’ve become obsessed with certain companies to see how we can apply what they’re doing to our law firm. For example, I’m fascinated with how a company like Uber has disrupted the transportation industry. What can my firm do on the legal side to disrupt? Our willingness to do so much work on a flat fee basis is somewhat disruptive in that I have actually had lawyers complain to me about our doing that.

In your article for the Oregon Law Review, you talk about the aversion lawyers have to marketing. Why do you think that aversion exists?

One thing that propels lawyers is this idea that the world is a meritocracy. The typical lawyer goes to high school, works hard, does well; goes to undergrad, works hard, does well; and goes to law school, fights to be in the top 10% of the class. Your first job is determined in large part by how you did in law school. Lawyers’ formative lives are based on reaching an attainable, pretty much numerical goal and then being rewarded for it.

Then they get in the real world, and all of a sudden the clients don’t care that they graduated from law school magna cum laude. They care about what you can do for their companies. Lawyers get thrown for a loop by that.

Lawyers don’t like the idea of having to compete. They had to compete in law school, but it was for a very clear goal. Now all of a sudden, they have to meet with 10 people in the hopes of getting two clients, and the carrot at the end is just not as clear cut.

And again, there’s the whole idea of uncertainty and risk. Lawyers will often talk about how this doesn’t work or that doesn’t work, and they do it with marketing, too. So many are unwilling even to try because they cannot get past the idea of failing.

When we first started marketing via our website and our blog, almost all lawyers would say, “I’ve heard you can never get a good clients off the internet.” They would state it like it was a fact, even though they had no evidence to support it.

Lawyers don’t like experimentation, the idea of “let’s try this and see if it works.” That’s too risky. And marketing is that: sometimes you think something’s going to work and it doesn’t, sometimes you think it’s not going to work and it does. The uncertainty kills lawyers.

Looking to the future, what kinds of firms are going to survive?

The first-tier big firms are absolutely necessary and will continue to thrive, as will some regional firms. But then there are the second-tier big firms that don’t have a niche, that aren’t as good as the Skadden Arpses, the Kirkland & Ellises, and the Latham & Watkinses of the world. These second-tier big firms are slowly getting edged out by both big and small firms.

Whenever our firm competes with a second-tier big firm for a matter, I love it because we offer so many advantages over them and yet they charge so much more than us.

The typical client that comes to us is not going to Skadden, Arps. You go to Skadden, Arps for the really big international deals, the really big international litigation. We get smaller international deals and smaller international litigation. Oftentimes we’ll compete for that work with a 250-lawyer law firm not nearly as well focused as us and yet it has a much higher cost structure. They might put five lawyers on a matter on which we would put two lawyers, or three lawyers on a matter on which we would put one lawyer and a paralegal or an international business specialist.

These second-tier big firms like to think of themselves as a Skadden Arps and they are trying to emulate Skadden. But they’re not Skadden.

Have you noticed differences in how the Millennial generation of lawyers thinks and works compared to its predecessors?

Absolutely. The Millennials are more in tune with business. They’re more comfortable with technology, they’re more comfortable operating anywhere, and they’re more comfortable appearing more “normal” and less lawyer-like, not using lawyer-type words. I think they understand better what clients want. Too many older lawyers feel compelled to tell potential clients everything about their own backgrounds and the work that they’ve done, rather than listen to the client and respond directly to that.

There are Millennials who have formed their own law firms, and they use newer technology. Within my firm, I oftentimes have to fight the older lawyers (of which I am one) on certain things. For instance, we set up Yammer – which is really nothing more than an internal Facebook – and some of our lawyers complained. They were worried about security, saying we shouldn’t be discussing firm matters “in the open.” But the security on Yammer is the same as for our emails. Both Yammer and our email are on Microsoft Office 365, and so both are equally unlikely to be compromised.

Then there are various groups in the firm that really use Yammer. One is our Regulated Substances Group, which Hilary Bricken has headed since she was 28 years old. There will be five to ten discussions every day on that group’s Yammer page. Someone will say, “Hey, I read this article about what they’re doing in Oregon. Does this make sense to you?” Or “You know, I just saw that in California, they’re going to do this. Maybe we should be doing that.” Then five or six people will respond to it.

In other groups, somebody will send an email saying, “I’m going to this event, does anyone know anyone who will be there?” They will carbon-copy eight people, including me, and then my inbox will get slammed with twenty emails from three people discussing some person I don’t know who might be at some event I won’t be attending. I don’t care, yet I’ve got twenty emails on it. I am constantly pushing people to stay out of my inbox. Put it on Yammer. Older lawyers often have trouble with that.

Have you seen Millennials struggle with certain imperatives of the profession, like having to actually call people on the phone instead of emailing or texting?

Yes, but I don’t view that as a negative.

One of the things I always talk about in terms of marketing is that anybody can be a good marketer. I used to help coach my daughter’s high school basketball team in the offseason. They had a player who was 6’4” and heading to the University of Washington with a full ride. She was a terrific player, and was going to get 12 rebounds a game. But for us to win, every single starter needed to get four or five rebounds. We couldn’t just rely on her. It’s the same with marketing; everyone needs to contribute in their own way.

There’s this idea among lawyers and probably others that the best marketer is the car salesman or the quarterback type . The reality is that’s just not true. There are many different types of potential clients out there. Millennials can be extremely effective with other Millennials. They can be extremely effective by being who they are, and dealing with people like them. That means texting and emailing instead of calling.

Millennials tend to be very morally centered. They really dislike working on matters when they don’t like the client, and there have been times when they have refused to do so and so we sent the client walking. There’s something to be said for that. They really like working on matters when they believe in the client. We typically discount our fees for not-for-profits. They like that.

This idea that Millennials are lazy, I don’t buy that. I’ve not seen that. They want freedom, and we give it to them. We’re a law firm that doesn’t care when or where our people do their work. We just care about the quality and the timeliness of the work. Our attitude on this jibes with what they are seeking and in that way we are a good fit.

One thing I’ve noticed – and I don’t think this is necessarily peculiar to Millennials, but a factor of being a new lawyer – is that I’m more confident in them than they are in themselves. They’ll look at their workload and see that in three weeks, five things might happen, so they’re reluctant to take on anything new. I see it as my job to convince them to go ahead and take on something new. Of those five things, probably only two or three are actually going to happen. I encourage them to take on a little more risk.

How has technology affected the way you practice law?

I generally dislike most legal technology because it’s lousy. But there is a lot more VC money starting to go into it, so I’m hopeful.

We use a program called Clio. It’s a cloud-based software program geared to law firms, and way better than anything was five years ago. There’s another one called RocketMatter. RocketMatter and Clio very much compete. Both are dubbed “comprehensive legal software.” I would describe them as pretty good – the competition is definitely helping – but every once in a while, we come up with something that’s not that unusual that is just not possible to do in the software.

When it comes to software for our firm, the best software we use is non-legal. One program I always rave about is called DocuSign. It’s very simple, and it just works. I think all programs should be like it. We love it because we can get off the phone and send clients a fee agreement in five minutes. The client doesn’t have to print it out, sign it, scan it, and email it back, which is the way most law firms operate. Everybody in the firm has a record of what’s going on with the fee agreement because it’ll show when it went out and when it was signed, and it’ll stay up in the cloud. It’s really a good program, and there are very few of those that work well for law firms. The proof is that all of our lawyers use it. Here’s a contrast. Our firm is a member of an international legal and accounting association based in Spain. When we joined this association last year we had to sign a document and then overnight the original to Spain. The association would not even accept a pdf!

There’s another software program we love called LawPay. One of the problems law firms have with alternative payments (forms other than check) is that when money goes into a trust account, it cannot touch the hands of a third person. So law firms cannot use PayPal or credit cards for trust account payments. If you have a big case and you’re charging by the hour or by the month, or if you want an advance fee payment, you have to use something like LawPay. LawPay may be the only company that does this and somehow it’s set up so that it complies with the bar rules.

Now we can get off the phone with people – it happens two or three times a month – they’ll sign the fee agreement, and we’ll be paid within 10 minutes. It’s just amazing. This is unbelievably efficient for everyone involved and our clients will often compliment us on it and I have no doubt it makes them feel even better about having chosen my firm for their legal work.

What would you like technology to do for you that it presently can’t?

We’re an all-Mac law firm, and as far as I know there is no good document generation software for Mac that’s dual language. We do five or six manufacturing agreements a month with Chinese manufacturers. These agreements are fairly complicated agreements and vary with each client, each product, and each manufacturer.

A manufacturing agreement for having your candy made in China is going to be very different from a manufacturing agreement to have golf carts made in China – the time periods, the standards, etc. But there are always going to be similarities. What I would like is a document system that would allow us to easily pull and re-use provisions in both the English (or the Spanish or the German or the Japanese) and the Chinese. For instance, if we know that there is going to be a 1% penalty for every day beyond a week that the product delivery is delayed, it would be nice to be able to review our ten best delivery delay provisions and just click the one that best fits, in both languages.

Like in a dropdown menu in the software? So you don’t have to copy-paste from past agreements? 

Exactly. That’s not out there yet. We charge a flat fee for these manufacturing agreements, so any inefficiency is on us. If we could save even 30 minutes on each one, that’s real money. We would be willing to pay a lot for a Mac program that could do that in both our client’s first language and in Chinese.

Have you ever applied an idea from another field to help you do your job better?

All the time. Henry Ford. I want everybody to have the exact same computer in our firm, we buy our desks from the same company, and everybody has the same chairs. I want the small things to be systematized, so that we are freed up to deal with the bigger things. If somebody has a problem with his or her computer, I don’t want a staff person to have to spend three hours researching the best computer to buy. He or she can just replace it right away with a MacBook Air. It takes three minutes. The same is true if we need a new chair or a new desk.

We have loyalty with our vendors because it allows for smoothness. Could we maybe get a better deal somewhere else? Yes, but then we are taking a risk that it will be a disaster and five hours will be wasted. I borrowed that from Henry Ford. I want our firm on the low-level things to be an assembly line, to be routinized.