China AttorneysBecause 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.

Our China attorneys are far too often are asked the following, usually with the following sort of lead-in:

The owner of this Chinese company has become like a brother to me. Whenever I go to China, we go out to dinner together and then drinking. He even invited me to his daughter’s wedding. Do I really need a contract with his company?

Our answer: yes.

And if we really need to explain why, then you have not been reading this blog and you either just have to trust on this or go back and read it.

China employment lawAs a China employer, you should you have a written employment contract with your part-time employees, even though Chinese labor laws do not require it, for the reasons set forth below.

First, the rules in your locale (e.g., Shanghai) may require you to have a written contract if your part-time employee requests one, so you may as well be prepared. Being able to present a contract to your potential hiree shows you are prepared and know how things work in China. If your employee becomes convinced that you (a foreign employee) don’t know how Chinese employment laws work, you could be setting yourself up for future problems. Chinese employees file more grievances against foreign employers than their Chinese counterparts, especially against those they perceive as not understanding China.

Second, a written contract can be used to make your part-time employee’s work responsibilities and obligations clear. Performance issues are more likely to arise when your employee is unclear on what he or she has been hired to do.

Third, written contracts are the best way for you to protect your confidential information, trade secrets and intellectual property from exposure by your employee, part-time or otherwise. A written contract and an enforceable damages clause written to deter your part-time employee from stealing your IP, trade secrets or confidential information can go a long way towards preventing your employee from taking these things to his or her next employer.

But if it’s not done right, a written employment contract can actually backfire. For example, under China’s Labor Contract Law, a part-time employee can work no more than four hours a day and no more than 24 hours in a week and most municipalities enforce this. So if your contract with one of your part-time employees provides that he or she must work 35 hours a week, you are at risk of converting that employee to a full-time employee. And that now full-time employee could sue you for all the unpaid social insurance benefits you were supposed to pay but never did and the labor bureau almost certainly will also fine you for having failed to make mandatory social insurance contributions. Or even worse, it can suddenly become incredibly difficult or even impossible for you to terminate your employee because not only did your bad contract convert your employee to a full-time worker but it also was an open-term contract. See China Employment Contracts: Ten Things To Consider.

If you have any part-time employees or if you plan to hire any part-time employees, you also probably should add a section to your rules and regulations regarding such employees. The reason for this is simple: China-based employers must provide all of its employees with a copy of the employer rules and regulations and all of its employee will be subject to these rules and regulations. If you don’t make clear that certain company benefits are not available to your part-time employees, you are setting up your part-time employees to believe and then to argue that they are entitled to those benefits because your rules and regulations essentially say that they are. You also should make sure that your rules and regulations do not opt your part-time employees out of any mandatory benefits to which they are entitled, such as work-related injury insurance. You should be sure to follow all of the formalities and make all of the filings required by your local labor authorities. Do not forget: Many China labor laws are local, and the laws on part-time employees are certainly no different.

Bottom line: Part-time employees have their own special issues in China and you ignore them at your peril.

Negotiating with Chinese CompaniesIn this series of posts I am looking at themes explored by Lucian Pye in his work Chinese Commercial Negotiating Style and how they relate to negotiating with Chinese companies. Pye concludes that most Sino-American negotiations are initiated in a way that helps the Chinese side achieve its preferred strategies and tactics. My first post, Contract Preliminaries and Courtship Rituals, looked at how Chinese companies tend to control the preliminaries during what I have called the “courtship” phase. In this post we will see what Pye has to say about the Chinese tendency to prefer agreements on generalities.

Pye observes that Chinese culture traditionally shuns legal considerations and instead stresses ethical and moralistic principles. By contrast, Westerners are thought to be highly legalistic. The Chinese tend to reject the typical Western notion that agreement is best sought by focusing on specific details and concrete matters while avoiding discussions of generalities or rhetoric. The Chinese prefer to agree on general principles before dealing with details. They can, Pye says, be tenacious in holding to their principles but surprisingly flexible about details. The Chinese focus is on the “spirit” of the deal. Agreement on principles usually takes the form of letters of intent or protocols, the purpose of which often mystifies the Westerner. The Chinese attach great importance to symbols and symbolic matters. Symbols such as the spirit of the agreement have a reality for the Chinese and there is a distinct Chinese bias in favor of the publicity or “face” these symbols can generate.

The Chinese, Pye says, conceive of their business relationships in longer and more continuous terms than Westerners. They expect an agreement to set the stage for a growing relationship in which it will be proper for the Chinese to make increasing demands. A proclivity for seemingly unending negotiations can even make the Chinese insensitive to the possibility that “canceling” contracts may cause trouble in the relationship with the foreign party. From the Chinese perspective, nothing about a contract is ever final. Westerners usually think a contract will provide for a given period of fixed and predictable behavior but the Chinese look for continuous bargaining and regard this bargaining itself as suggesting an enduring relationship. For Westerners there can be a great deal of give and take before agreement is reached, but afterwards the expectation is that neither party should lean on the other to seek further advantages. For the Chinese, the very achievement of a formalized agreement, like the initial agreement on principles, means that the parties now understand one other well enough that each can expect further favors. They will therefore not hesitate to suggest changes immediately on the heels of an agreement. They tend not to treat the signing of a contract as signaling a completed agreement.

Pye advances several explanations for the Chinese tendency to seek early agreement on general principles. First, he says, it is easier to extract concessions when details are to be worked out later on. Second, agreement on principles can easily be turned into agreement on goals. This can in turn support a later insistence that all discussion of concrete issues must support these goals. Finally, Pye says, agreement on general principles can be used later to substantiate tactical claims of bad faith.

More on tactics in the next post in this series.

One final point: Pye never moralizes or suggests there is anything wrong with the Chinese approach. He merely points out how different it is from the typical Western approach, leaving readers to conclude that foreigners ignore or disregard the Chinese negotiating tactics at their own peril. This is certainly consistent with our view that one should not rush to blame the Chinese when things go wrong.

Negotiating with Chinese CompaniesIn the early 1980s the US Air Force commissioned Lucian Pye, an eminent sinologist, to write a report on how Chinese negotiate with foreigners. Published in 1982, it was called Chinese Commercial Negotiating Style.

A friend of mine recommended Pye’s work to me recently, saying he wished he had read it twenty years ago when he first started working in China. Based on extensive interviews with Americans engaged in China trade, Pye’s paper analyzes the negotiating style the Chinese use with American businesspeople. To control for American cultural bias, Japanese traders were also interviewed. Pye’s overall conclusion was that the way most Sino-American negotiations are initiated usually sets in motion a process that helps the Chinese side achieve its preferred strategies and tactics.

Though some of Pye’s political and economic observations are, quite understandably, now rather dated, I was nonetheless struck by his report’s enduring relevance and, like my friend, I now recommend it to anyone interested in doing business with China. To merely summarize his work would be to do it a disservice so I have attempted to draw out some of his major themes and look at them in a series of posts. A recurring theme is Chinese mastery of contractual preliminaries.

In Pye’s view, foreigners often follow the historical practice of coming as guests seeking permission to do business in China. This naturally casts them in the role of supplicants asking for Chinese beneficence. They are visitors from afar and their hosts call the tune on the procedures and the timing of meetings. Problems associated with visas, invitations and access to officials or business leaders contribute to foreign anxiety about “doing the wrong thing” when doing business in China. So when problems arise, the foreigners are prone to suspect they are somehow at fault. In this way, the Chinese hosts gain the advantages of surprise and uncertainty in agenda arrangements.

According to Pye, the Chinese tend to limit preliminary exchanges to generalities so as to size up the foreign party and to determine its vulnerabilities, especially any lack of patience. At the same time, foreign business leaders tend to jump straight in. The novelty and status associated with visiting China frequently compel foreign CEOs to be the first to engage in talks with the Chinese, without waiting for subordinates to prepare the ground. The graciousness and bountifulness of Chinese hospitality can make the foreign visitor feel awkward about being too businesslike. Consequently, foreign CEOs tend to be very obliging in following the Chinese practice of seeking initial agreement on very general principles, without clarification on the specific details. Much of what occurs at the preliminary stage has a tacit quality and foreigners frequently misjudge their progress. In taking this approach, Pye says, foreigners violate one of the first principles of negotiations and diplomacy — summit meetings should never take place without extensive preliminary spadework by subordinates.

When mid level executives are later sent in to work out the details of a contract they usually discover that the Chinese want to rely on the agreed “principles” that were put in place by the CEO. Such principles were often taken by the foreigners to be no more than ritual statements but the Chinese tend to use them to practical advantage by suggesting the other party has not lived up to their “spirit.” See China LOI and MOU: Don’t Let Them Happen to You. Instant authorities on China, these CEOs returned from their initial visits to report success, saying they found the Chinese to be cooperative and gracious. The mid level executives and others tasked with working out details then come under great pressure. They are constrained to avoid acting in ways that might irritate the Chinese and spoil relationships established by the boss. So, when the big guns are sent in first the foreigners lose the advantage of dispatching their highest people for critical negations at the consummation of the deal. Their second appearances must now be limited to generalities where civilities prevail.

I found Pye’s observations both persuasive and broadly consistent with my own experience. Having said that, he is clearly more concerned with the affairs of government and large corporations than he is with SMEs or creatives who may not have support available from a middle level of management or administration. The pitfalls Pye identifies can be minimized, he says, if foreigners recognize that in the initial stages of negotiations, the Chinese usually only want highly generalized in-principle agreement to the effect that a relationship is possible.

In my next post I will look at what Pye has to say about Chinese attitudes to contract formation.

China Business LicenseChina lawyers love China business licenses and we frequently use them to make sure that the signing party to a China contract actually exists and is an officially registered entity. We also love them because they are often a fast and cheap treasure trove of helpful information. Reviewing a China business license is usually the first thing we do by way of due diligence in any M&A deal, and in most other deals as well.

The below is an email from one of my firm’s China attorneys to a client, explaining what we were able to garner from the China business license of a Chinese WFOE our client was interested in purchasing.

  1. Company name: _____________.

No English language equivalent is given in the documents (which is unusual), but this translates as _____________(Beijing) International Trading Company Limited.

  1. Company address: Beijing City, Dongcheng District, ________Number ____, Unit ____.

This is a prestigious location in the center of the high‐end retail/office district.

  1. Registered Capital: $600,000 US.

The amount is relatively high because high registered capital is typically required for trading companies. A Chinese CPA must verify all registered capital contributions. You should obtain a copy of the verification. Note also that all WFOEs must undergo an annual audit and file an annual tax return. We should obtain a copy of the audit and the filed tax return(s).

  1. Representative Director: ____________

This person has primary authority for all company operations. We should ensure that you have complete control over this person together with the company seals/chops, bank accounts/bankcards and primary company documents. We should also immediately determine 1) who is the general manager and 2) who are the members of the board of directors.

  1. Formation date: __/__/2011. Inspected and approved: __/__/2012.

It is good that the company has been formally inspected. It means someone is trying to follow proper procedure.

  1. Scope of Business: Wholesale for various consumer goods; financial and business management; import and export of goods and technology, including export‐import agency.

This is a very broad scope of business that allows you to do consulting business in addition to trading. This is somewhat unusual and is a very good thing for you since it maximizes the flexibility of the WFOE. However, this scope of business does NOT allow the WFOE to operate as an advertising agency (see discussion below). On the other hand, the existing scope of business allows you to advise your customers on where and how they should place advertising and you can charge a fee for the service. You can also act as an intermediary in arranging with an advertising agency for placement. However, you cannot contract directly place the advertising. Only an advertising agency can do that.

  1. Shareholder: _______________Holding Company.

This appears to be the proper shareholder.

Advertising Agency Issue. Here is a brief review of the advertising agency rules. To place advertising in China, a company must be a licensed advertising agency. Foreign companies are permitted to form a wholly foreign owned advertising agency but the rules for doing so are quite strict. The primary rule is that you must prove that 85% of your income over the last 3 years comes from advertising. How you “prove” this is not stated in the rules. There are also special rules related to staffing and registered capital that add extra burdens.

The main issue, however, is the one I raised above. You cannot simply amend your current scope of business to add operation as an advertising agency as an additional item within the scope. Instead, you must form an entirely separate company, with a separate office address, staff, registered capital and the rest. As we discussed, you can, of course, enter into contracts between your Chinese entities that would allow you to offer an integrated package of services to your customers. But beneath that integrated package you will need to maintain a strict separation between the entities. Thus the person who formed the existing WFOE trading company did not make a mistake with respect to the scope of business. Rather, no one has taken the additional step of forming the additional company that would act as an advertising agency in China.

How to protect your IP from ChinaPreviously on China Law Blog…

In Part 1 of this three-part series, we discussed the background of the Talpa-Canxing dispute over The Voice of China. In Part 2, we discussed what happened after Canxing broke Talpa’s heart. Now, in the thrilling conclusion, we discuss some of the things you can and should do if you are licensing content in China and wish to avoid Talpa’s fate.

As a preliminary matter — before you license anything to anyone in China — you should register, in China, any of your intellectual property worth litigating over. That means registering not only your English-language trademarks but also the Chinese-language versions of those trademarks. If the Chinese-language versions don’t exist, it’s time to create them. Because if you don’t, someone else will, and they’ll register it too — just like Zhejiang Television did with 中国好声音, the Chinese version of The Voice of China.

That also means registering copyrights for any meaningful content. For television shows, that means at the very least registering the show bible, scripts, and any produced episodes. It’s true that China is a signatory to the Berne Convention and therefore a valid copyright in the US or Europe is valid in China without registration, but for practical purposes, it’s much easier to enforce a copyright in China if you have registered it in China.

Do not delegate the task of registering your IP in China to your Chinese licensee. The licensee’s interests may not always be aligned with yours.

Once you have registered your IP in China, you should draft an enforceable contract to protect your interests in China as against the Chinese licensee. A contract with the licensee’s Hong Kong affiliate, with disputes resolved by arbitration in Hong Kong (or any other country other than Mainland China), achieves none of these goals. Yet this is what we see again and again from companies who either don’t trust or don’t understand the Chinese court system. I haven’t seen the Talpa-Canxing contract but it appears to have followed this model, as the dispute was submitted to arbitration in Hong Kong. The problem is usually not that Chinese law won’t protect foreign content owners. The problem is usually that content owners (and their lawyers) often decline to take advantage of the protection Chinese law offers. They write contracts designed to be unenforceable in China, and then complain about China’s legal system when their contracts prove to be worthless.

A properly drafted contract would address the following issues:

1. Make sure that the contracting party on the licensee side is the actual Chinese entity that will be licensing the content, and not a Hong Kong affiliate. As a corollary, choose the right law and the right jurisdiction for your dispute. If you want to sue a Chinese company for breaching your contract by using your IP in China, choose Chinese law and dispute resolution via Chinese courts in the hometown of the Chinese licensee. See China Contracts: Make Them Enforceable Or Don’t Bother and China Contracts. Watching The Jurisdictional Sausage Get Made.

The issue with contracting with a Hong Kong company is not so much that the Hong Kong company may be a shell company with no assets (although that is often the case). Rather, the issue is that any legal resolution in Hong Kong is unlikely to be effective in China. And if you’re licensing content to China, China is where the action is going to be. Hong Kong still has the common law system passed down from its days as a British colony; it favors injunctive relief and disfavors liquidated damages (aka contract damages). China is the opposite. What good is injunctive relief in Hong Kong if you’re trying to get the judgment enforced in China, which disfavors injunctions? You might argue: we will arbitrate in Hong Kong but provide that Chinese law governs. For a variety of reasons that almost never works, particularly if the defendant is a Hong Kong company. Meanwhile, the infringement in China continues.

2. Provide for upfront payment of the license fee in an amount that makes the deal worth it to you even if the contract is terminated early. See China Licensing Agreements: The Extreme Basics. Provide for substantial contract damages for late or non-payment of the license fee, and do not provide the Chinese side with any of your content until it has paid the license fee and the funds are in your bank account.

3. Provide for substantial contract damages for (1) early termination and (2) each instance of infringement. Do not mess around with lengthy provisions about injunctive relief. Unlike the common law systems of the United States, Canada, Great Britain and Australia, contract damages are not disfavored under Chinese law. In fact, use of contract damages is well established in China and favored by statute. On the other hand, though Chinese judges may be legally empowered to issue injunctive orders, they have virtually no power to ensure those injunctions are implemented. There is no Chinese equivalent of the U.S. Marshals Service. For this reason, Chinese judges are hesitant to issue an order they know is likely to be ignored. Instead, they will seek to convert every decision to an order to pay a sum certain in damages. Including a contract damages provision gives a China judge the roadmap. Most importantly, since Chinese companies know well the power of contract damages provisions, your merely having one in your contract greatly increases the odds of your Chinese counter-party abiding by that contract.

4. The contract damage amounts must be a good faith estimate of the actual amount of income that would be lost by the licensor in the event of early termination. These amounts are not guaranteed even if the plaintiff prevails: at trial, the defendant can argue that the contract damage amount is too high and the plaintiff can argue that the amount is too low. The utility of contract damages is that when a plaintiff seeks pre-judgment attachment of assets China’s courts will almost always allow attachment in an amount equal to contract damages if such damage amount is specified in the contract. In contrast, if the contract provides for injunctive relief and monetary damages in an amount to be determined at trial, it is virtually impossible to obtain a writ of attachment. To repeat: Chinese companies do not like putting their assets at risk of being seized and so having a contract damages provision is a great deterrent.

Note also that an arbitration body cannot issue an enforceable assets seizure order and it is also virtually impossible to obtain such a writ from a court outside the district where the assets are located. That is why we normally want to sue in the “home town” of the defendant, even though that sounds counter-intuitive to a most U.S. and European lawyers, who have been taught to avoid getting “home-towned.” The Chinese understand the “home town” issue, which is why there is an automatic right of appeal to a higher court in a different town, and also why such appeals are de novo. Home town favoritism is often reversed at the higher court level.

5. Do not rely on the default provisions of Chinese intellectual property law to protect you against your licensee. Chinese IP law and your IP registrations protect against random third-party infringement. If you want protection against your licensee stealing your IP, put it into the contract. Your contract with your licensee is your best chance to control your Chinese counter-party and to protect yourself. Take advantage of it by using a contract that actually achieves those things.

6. The license term should be relatively long; say, five years. If the term is too short, then the penalty for early termination becomes irrelevant.

If your Chinese counter-party refuses to sign a contract that addresses the above, you know what they have in mind and you should reconsider whether to do the deal.

And so ends our story….

The Economist Magazine (some of the absolute best writing on China, BTW) just came out with an article, entitled, The Innovation Game. It is on the recently issued Global Innovation Index, published by Cornell University, INSEAD, a business school, and the World Intellectual Property Organisation. The index ranks 140 countries and, “not surprising: Switzerland, Britain, Sweden, the Netherlands and America lead the pack.”

What I (and the Economist) found most intersting about this work, was some of the breakout analysis looking at how countries do relative to their wealth. As the Economist noted from the below graph, “many countries in Africa punch above their weight.” What is also apparent from the below graph is that Arab countries — with Qatar the worst of the worst — fare quite poorly. China does very well on this innovation to wealth measure, as does Vietnam.

China innovation

The Economist also graphed out some of the countries based on the quality of their innovation and their wealth and in this China soundly ranked at the top of the list of “middle-income countries,” as can be seen from the below:

China Innovation

So is China innovative? Based on this report, I think the answer has to be yes, at least relative to its wealth. Your thoughts?

For more on China innovation, check out Can China Innovate? and Does China lack “A reliable way to protect valuable inventions”? Hold on there . . .

China AttorneysBecause 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.

One of the more common emails we get are similar to the following one I received just this morning:

I have an associate who has a family-run ______ business in Sierra Leone. They have drummed up interest in China and want to move forward. Before they do, I have recommended they are 100% clear on the customs side for importing 1) ________ and 2)________ into China.

My question is can you advise on where to find additional information on such customs claims?

My answer was as follows:

I don’t understand your question or your associate’s situation. You make it seem like they are considering importing ______ and _________ stones into China, but yet you want information regarding a customs claim. Has the Chinese government already made a customs claim and, if so, what sort of claim?

Generally, for customs matters and pretty much all legal matters in China we start by determining the relevant Chinese laws and then reading them. We typically then read relevant Chinese cases and regulations that relate to or interpret those laws. Depending on the legal subject matter, we sometimes seek out the local regulations as well, and then we speak with the relevant government authorities to determine whether our views on the laws and regulations correspond with their views on the laws and regulations. Most importantly, we want to get their views on how the laws and regulations apply to our client’s specific situation. The Chinese government can be very helpful with these things and since it is their interpretations that matter in the end, this last step is oftentimes the most important of all. This tends to be especially true with customs where much is based on customs (pun intended) as opposed to the written law.

 

 

China IPPreviously on China Law Blog…

In Part 1 of this three-part series, we discussed the background of the Talpa-Canxing dispute over The Voice of China. Now we’ll see what happened after Canxing broke Talpa’s heart.

Undeterred by Talpa finding a new licensee, Canxing announced that it would keep producing a singing show. The format would be different, Canxing claimed, but the name would be virtually the same: The Voice of China 2016 and 2016中国好声音. Because – surprise! – Canxing’s distribution partner Zhejiang Television was the registered owner of the 中国好声音 trademark.

Talpa sought a preliminary arbitral award in Hong Kong against STAR Group Limited, Canxing’s Hong Kong affiliate. But the Hong Kong International Arbitration Centre (HKIAC) denied Talpa’s request (at least insofar as it pertained to the Chinese name) because Talpa had no rights to the Chinese name. Did we mention that Talpa should have registered the Chinese-language trademark?

More or less at the same time, Tangde filed suit in a Beijing IP court against Canxing, claiming trademark infringement and unfair competition, and seeking a preliminary injunction. To the surprise of some, on June 20, 2016 the Beijing court ruled in Tangde’s favor insofar as the name of the program, holding that Canxing could not call its program either The Voice of China or 中国好声音. Canxing appealed the ruling, but changed the English name to “Sing! China.” On appeal, Canxing lost again, and complied with the ruling by changing the Chinese name of the show to中国新歌声, which roughly translates as China’s New Singing Voice.

Around June 13, 2016, while all of these legal proceedings were ongoing, SAPPRFT issued a directive curtailing the airing of television programs based on foreign formats. The directive clarified that programs produced in a foreign country (like The Big Bang Theory) and programs based on a foreign format (like The Voice of China) would both be considered foreign content, and that television channels (1) would have to secure prior government approval to air such programs, (2) could only show two foreign content programs during prime time each year, and (3) could only show one new foreign content program each year, and not during prime time in the first year.

On July 15, 2016, the first season of 中国新歌声 began on Zhejiang Television. It had the same judges as last year’s season of中国好声音 and an almost indistinguishable format. As of this writing, the season is about half over, and the main difference appears to be that during the blind audition phase, instead of swiveling 180 degrees, the judges’ chairs slide down a long ramp. Everyone I know who watches the show (including my entire family) agrees it is virtually the same show. And it seems to be as popular as ever, both with the viewing audience and with the sponsors.

The coverage to date has focused on this story as a contract, copyright, and trademark dispute. That’s true enough, and as far as that goes it’s not a particularly noteworthy dispute by Hollywood standards. Indeed, the fact that this dispute is the subject of multiple legal proceedings could even be seen as a sign of China’s maturity as a media market. Twenty years ago, if a Chinese production company copied an American or European television program, no one in the West would have cared (much), because (1) the rights owner would not have had a plausible remedy in China, (2) the Chinese company never would have paid for the rights, and (3) even if it had paid, the amount paid would have been a pittance.

But there’s another story here. By making a few superficial changes to the show and changing the name, Canxing and Zhejiang Television are trying to skirt the restrictions on foreign content. According to them,中国新歌声 is a 100% Chinese content show. Canxing has also stated that it won’t purchase any more foreign formats in the future.

If Canxing and Zhejiang can get away with such copyright infringement — and thus far they have – this becomes a cautionary tale for foreign content owners licensing to China. Chinese companies may still see value in licensing foreign formats, because just copying a show isn’t as easy it looks. Indeed, that’s why Canxing and other Chinese production companies have been paying serious money for the most popular formats. But once they have received the production bible and produced a season or two, what incentive do they have to keep paying a license fee, if they can make a couple changes and call the show 100% Chinese?

It will be interesting to see how (or if) Canxing and Zhejiang Television are held accountable for 中国新歌声. Licensors of content have to look at this case and think seriously about frontloading any payments. They might not get a second bite.

Stay tuned for the thrilling conclusion, where I’ll discuss how content owners can better protect themselves when licensing to China to avoid the sort of trainwreck Talpa appears headed for.

Negotiating with Chinese companiesJust read a great post over at Andrew Hupert’s ChinaSolved Blog, entitled, Lessons from the G20 for “Regular” Negotiators. Hupert, who I count among the foremost experts at negotiating with Chinese companies, uses China’s recent dissing of President Obama as the springboard for explaining how foreign companies should negotiate with Chinese companies.

Hupert starts out his post by saying that no matter how seriously you view China’s treatment of the American entourage, it was “real” and mitigating or glossing over a conflict as “unimportant” is counter-productive and dangerous. “This was a significant event, and if you are negotiating with a Chinese counter-party then you need a plan for dealing with similar encounters.”

I completely agree with Hupert’s point and I have to say that our China lawyers too often encounter minimizing or tortured explanations of Chinese behavior from our clients. Chinese company didn’t pay on time? Must be because it didn’t understand the contract? Chinese company said it would do X and then did the exact opposite? Must be because of Chinese cultural differences. We hear these sorts of explanations all the time and our response to them is always something along the following lines: these are smart people who know exactly what they are doing. They are testing you and if you let them get away with it this time, you will be opening up the door to future incidents.

Or as Hupert so aptly puts it:

Ignoring them or pretending that they are immaterial to your business is a major blunder. Your negotiating counter-party is a serious person with experience, values, and attitudes that are very different from yours. Culture gaps are real, and they are not going away. If you are going to work with counter-party, then these differences will be part of your business — and part of your life.

Say “thank you”. The Chinese side is supplying your with free information. They are illustrating who they are, what they care about, and how they react to situations. Accidental honesty is the most significant kind. Behaviors are deeply rooted and consistent. Ignore them at your own risk.

Hupert then counsels you to take the free lesson and use it to analyze your Chinese counter-party: “It is your job to understand his attitudes, his values, and his culture.” And then you need to make any necessary adjustments in your own behavior, your deal structure and your business plan to reflect what you just learned.

Doing the right thing in these conflict-ridden situations is a tough thing because “it is human nature to do just the reverse – analyze us and attempt to adjust our counter-parties, but this only leads to conflict, failed deals, and value destruction.” Hupert concludes by calling on “breaking the cycle” by building “a negotiating plan that acknowledges (and even leverages) cultural differences.”

Great advice. Do you agree?

For more on what it takes for successfully negotiating with Chinese companies, check out the following: