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Your China Distributor. Because What Happens In China Doesn’t Stay in China.

Posted in China Business

Forming a company in China is almost always difficult and expensive. Operating a company in China is also almost always difficult and expensive.

Operating a company in your home country of England, the United States, Canada, Australia or wherever is itself plenty difficult, would you not agree? Now take what you have to do in your home country and add in the inherent complexity of having to do essentially the same things in a foreign country with a foreign language with a different culture and under different laws.

That’s China.

China company formations are more difficult and expensive today than they were five years ago, and the same holds true for operating a company in China. Add to this that China’s consumers are getting wealthier and savvier and you can see why there has been a rapid increase in companies seeking to sell their products in China without establishing a company in China to do so.

One of the more common ways companies seek to sell their products in China without forming a company is by having a Chinese company act as their distributor. For more on this, check out Selling Your Product To China Through A Distributor. Just The Basics.

A few months ago, I was contacted by an American company that had been approached by a Chinese company wanting to be “the China distributor” for the American company’s fairly well known consumer product. At one point during our conversation, I talked about some of the issues we address in our China distribution contracts. I talked about how we put in provisions dealing with the intellectual property. I talked about how we like to see provisions that set out the Chinese distributer’s sales requirements.

I then talked about how critical it was that we conduct due diligence on the Chinese company. The client responded by pointing out that the distribution agreement would allow it to quickly replace its Chinese distributor if it turned out not to be a good fit, and so it did not seem like any real due diligence should be necessary. I then quickly reeled off a number of things the Chinese distributor might do in the first few weeks of the arrangement that could jeopardize the U.S. company’s reputation worldwide. The U.S. company instantly understood.

Bottom Line: What happens in China does not stay in China. If your Chinese counter-party does something disreputable in China that some people would link to your company, your company’s reputation likely will suffer. This “something disreputable” could be anything from a product defect to paying a bribe. Even if your company’s connection to the “disreputable something” is extremely tenuous, if your company name is in any way attached to it, your company will likely suffer. The best way to prevent that sort of problem is to choose your partner wisely and the best way to choose your partner wisely is to know as much as you can about it by engaging in appropriate due diligence.


Preventing China Counterfeiting: The Basics

Posted in Basics of China Business Law, Legal News

When Christmas is approaching, China counterfeiting goes into overdrive, and this year has been no different. The real trick to reduce counterfeiting is to do the things earlier in the year that can help to prevent it. The more you do before you face an infringement problem, the less likely you are to have an infringement problem and the more that can be done to stop the infringement problem once it starts.

At minimum, we recommend the following:

  • Register your trademarks and copyrights with China customs as soon as your registration is complete.
  • Do not allow your manufacturers to sub-contract the production of your products.
  • If you do allow your manufacturers to subcontract the production of your products, enter into a separate agreement with the subcontractors that will protect your intellectual property.
  • Have an OEM agreement with your manufacturers that imposes liability on them them in the event of infringement by any of their subcontractors.
  • Enter into a formal mold agreement that makes clear that your molds belong to you and that imposes a significant monetary penalty on the primary contractor if your molds disappear.
  • When contractors/subcontractors are changed, immediately seek to locate your molds and get them back. Do not wait. Much of the counterfeiting we see stems from missing molds.

If you do the above, your chances of having an intractable counterfeiting go way down. If you do not do the above, they go way up. It is that simple.

Doing Business In China: Whatever Happened To The Warm Welcome?

Posted in China Business

I spoke last week at the American Lawyer’s (truly excellent) China-US Legal Summit. During one of the “networking breaks” while talking with a group of China lawyers and China businesspeople, someone wistfully spoke of “the old days” when China encouraged foreign investment with economic incentives. Someone else then said that they’d be happy if China would “just” encourage foreign investment, even without economic incentives. Nobody disputed that the welcome mat for foreign investment in China has been pulled or has shrunk considerably.

There was a time when companies doing business in China or seeking to do business in China would eagerly await the newest version of China’s Catalogue for the Guidance of Foreign Investment Industries, expecting it to add a whole host of new industries open to foreign investment, either as a WFOE or as part of a Joint Venture. I get the strong sense that anticipation for the newest version of the Catalogue has declined mostly because expectations for change have decreased.

The Chinese government is right now considerably more concerned with social harmony and the contentment of its citizens than with economic numbers, and you should always factor this into your China business decisions. China’s slowing economy and “external” political issues only heightens the Chinese government’s focus on contentment.

If you are doing business in China, or even just considering it, you should be mindful of the following:

  • Though China’s economy is slowing, the government will continue to encourage wage growth that makes its factories less competitive. The reason: citizen contentment.
  • China will continue to get tougher on foreigners, just as it (and nearly every other country) has always done when times are tough. Everything foreign businesses do will be under heightened scrutiny. Doing this makes its citizens happy, which makes it a no-lose proposition.
  • Chinese authorities are increasingly eager to distinguish between “contributing” and “noncontributing” foreign businesses. It has never been tougher for foreign companies that pollute, pay low wages, or have no plans to hire Chinese employees to get their foot in the door.
  • Chinese exporters, particularly those competing with companies from lower-wage countries like Vietnam and Bangladesh in low-tech, low-wage industries such as textiles, clothing, shoes, and low-end electronics and toys are suffering. Anyone who does business with such exporters will soon be sharing the pain, if they aren’t already.

Now is the time for you to think anew about what your company contributes to China’s economy and how that is likely to shape Chinese policy makers’ opinions. Focus on scrupulous regulatory compliance and renew your focus on due diligence at a company-to-company level.

In other words, be cautious out there.

China Entertainment Law Event, Beverly Hills, November 3

Posted in China Film Industry, Events

Our Beijing-based China entertainment lawyer, Mathew Alderson, will be speaking at a Beverly Hills Bar Association Event, on November 3, 2014, from noon to 1:30, at 9420 Wilshire Boulevard. The event is China’s Entertainment Industry: Exploring the Evolving Legal and Business Landscape. Mathew will be sharing the podium with Malcolm McNeil of the Arent Fox law firm. Brian Schaller of O&A PC will be the moderator.

Variety Magazine named Mathew a game-changing entertainment lawyer for his China work representing a number of the major Hollywood studios. Last month Mathew gave a similar talk in Beijing before the Foreign Correspondents Club.

A large contingent of our China lawyers will be at this talk and we hope to see you there. Click here for more information

China Employee Vacations: Don’t Stop Them. Just Don’t.

Posted in Basics of China Business Law, Legal News

China’s Regulation on Paid Annual Leave for Employees (《职工带薪年休假条例》) entitles employees (including dispatched workers) who have worked continuously for one year to paid annual leave. Their statutory vacation period is as follows:

  • More than 1 and less than 10 years service: 1 week (5 days) vacation
  • More than 10 and less than 20 years service: 2 weeks (10 days) vacation
  • More than 20 years service: 3 weeks (15 days) vacation

To be clear, the statutory limits set forth above are for the employee’s total years of employment with anyone. In other words, the years of service are based on the date your employee started in the workforce, regardless of employer. This means that even your employees on probation are entitled to take annual leave, so long as they have worked continuously for one year. During your employees’ annual leave, you as the employer must pay your employees the same amount of wages you would have paid each of them during the normal working period.

If you wish to provide more vacation time than the required time set forth above, you will need to specify that additional vacation time in writing, typically in your company’s rules and regulations. But note that once you specify in writing that you will be providing additional vacation time, you will be required to provide the more generous vacation time exactly as specified.

Employers are required to make arrangements for employees to take vacation time each year. Though it is permissible for your employees to carryover their annual leave for one year, this can be done only with the employee’s consent. Unused vacation time in one year can be carried over only to the next year; any carryover beyond that year is prohibited. It is generally not a good idea to allow your employees to carry over their annual leave because doing so can make tracking difficult and can increase your exposure to penalties if the employee later sues claiming never to have agreed to carry over his or her vacation.

An employer that fails to allow an employee to take annual leave must pay that employee 300% of the employee’s daily wages for each unused vacation day. The daily wage is calculated by dividing the employee’s monthly wage by 21.75, with the monthly wage usually defined as the employee’s average monthly wage (excluding overtime pay) over the 12 months prior to the date on which the employer pays the compensation for unused vacation time. If the employee has worked for the employer for less than 12 months, the average monthly wage will be based on the actual number of months of employee service.

If an employer arranges for the employee to take vacation days and the employee submits a written request expressly stating that he or she will not take those days, the employer is obligated only to pay the employee his or her normal daily wage for the unused vacation days.

Bottom line: Your employees are entitled to a yearly vacation and you as their employer should not stand in the way of this, unless you are not worried about having to pay a big penalty.  

Shanghai Free Trade Zone. Good For Game Console Manufacturers.

Posted in China Business, Legal News

About a year ago, we did a post, entitled, Shanghai Free Trade Zone As Damp Squib, in which we wrote about how our China lawyers (and a number of others) were having all sorts of trouble figuring out why the Shanghai Free Trade Zone mattered:

I am convinced it is destined to disappoint mostly because I have yet to figure out exactly who it is going to help and how.  The opening of the Shanghai Free Trade Zone actually happened while I was in Shanghai and I scoured the Chinese press (including the Shanghai press) trying to figure out who it would benefit.  In the end, all I got were some vague notions about what the Zone will allow but I never got the ah ha moment I would have liked.

In June, I did another post, entitled, The Shanghai Free Trade Zone. Yawn., asking why the Shanghai FTZ matters, or not?

I am also reminded of a friend of mine who is in-house counsel at a very large tech company in China who is always getting calls from people at his company complaining that their company isn’t doing more with the Shanghai FTZ, especially in comparison to other foreign companies. My friend says he responds by asking what more they should be doing and what exactly other companies are doing that is leaving his own company in the dust. He says that these questions produce either stammering or silence and he has yet to receive a real answer.

So tell me everyone, why is the Shanghai FTZ so important, or is it really just not?

Then in a September post, entitled, Shanghai Free Trade Zone. Still A Yawn., I borrowed from a famous War song to ask what is it good for?

Well in a Wall Street Journal article by Shen Hong, entitled, One Year On, Shanghai Free-Trade Zone Disappoints, which consists of interviews with a bunch of people who have determined that there is nothing their companies can do in the Zone that they cannot do outside the Zone. But, the article also talks of how Microsoft’s “new game console, the Xbox One, will go on sale through the Shanghai free-trade zone on Sept. 29. It will become the first game console to be legally sold in mainland China after the country lifted a ban that lasted more than a decade.”

So there’s your answer. The FTZ makes perfect sense for game console manufacturers — it really does.

How To Sue China Companies

Posted in Basics of China Business Law, Legal News

This post is a reprise of a post I did for the Above The Law Website, the law’s most read (and most interesting) website. This one  is part 1 of what will be a four part series, with the subsequent posts to be published every Tuesday (or so).

What should you do if you are owed money by or have been wronged by a Mainland Chinese company? Bring a lawsuit against the Chinese company, of course. But how?

Mainland Chinese courts do not enforce U.S. judgments. Therefore, it will probably be a waste of time for you to bring a lawsuit in a U.S. court against a Chinese company that does not have assets in either the United States or in a country that enforces U.S. judgments. However, it is important that you research where the “Chinese” company is actually based because Mainland China, Hong Kong, Taiwan, and Macao are different jurisdictions entirely.

This series of posts will discuss the challenges of litigating against Mainland Chinese companies and will offer guidance in overcoming these challenges, both in the United States and in China.

Jurisdiction. Jurisdiction will usually be the first issue you will need to resolve in formulating your litigation strategy against a Chinese company. Suing a Chinese company in the United States requires the typical contact inquiry involved in suing any foreign company. See Asahi Metal Industry Co. v. Superior Court of California, Solano Cty., 480 U.S. 102 (1987); Glencore Grain Rotterdam B.V. v. Shivnath Rai Harnarain Co., 284 F.3d 1114 (9th Cir. 2002).

An American company usually faces no jurisdictional bar to suing a Chinese company in Mainland China. Articles 3 and 237 of the Civil Procedure Law of the People’s Republic of China grant Chinese courts jurisdiction over international cases involving a foreign plaintiff against a Chinese company. Though suing in China is usually possible, it obviously should not be done without a better understanding of what it will actually entail.

If a U.S. court has jurisdiction over a Chinese company, suing that Chinese company in a U.S. court typically will differ from suing a domestic company on: service of process; discovery; litigation strategy; and the already mentioned enforcement of judgment.

Service of Process. China is party to the Hague Convention on Service Abroad of Judicial and Extrajudicial Documents in Civil and Commercial Matters. Thus, service on a Chinese company must comply with this Convention. Service under the Hague Convention on Service is effected through the designated Chinese Central Authority in Beijing, which is the Bureau of International Judicial Assistance, Ministry of Justice of the People’s Republic of China.

A U.S. company suing a Chinese company in a U.S. court must submit the following to China’s Ministry of Justice:

  1. A completed United States Marshal Form USM‐94.
  2. The original English version of the documents to be served. The summons must have the issuing court’s seal.
  3. The Chinese translation of all documents to be served. Because the USM-94 will not be served, that form does not need to be translated.
  4. A photocopy of each of the above documents.

Though China did not make a specific reservation regarding translations when it acceded to the Hague Convention on Service, China’s Ministry of Justice has advised the U.S. Embassy in Beijing that documents to be served in China must be translated into Mandarin Chinese. Since China’s Ministry of Justice is the government entity that effects service of process in China, it only makes sense to comply with its requirements.

China’s Ministry of Justice will send your service of process documents to the appropriate local court and that court will effect service. In our experience, Chinese courts are fairly slow (and getting slower) to send out service. If the Chinese company being sued is a powerful local entity, service may be even slower. Repeatedly calling and emailing both the court itself and the Ministry of Justice usually expedites service. You should figure on service taking three to six months.

China formally objected to service by mail under Article 10(a) of the Hague Convention on Service and U.S. courts have held that objection valid. See DeJames v. Magnificence Carriers, Inc., 654 F.2d 280 (3d Cir. 1981), cert. den., 454 U.S. 1085; Dr. Ing H.C. F. Porsche A.G. v. Superior Court, 123 Cal. App. 3d 755 (1981).

In Part 2 of this series, we will discuss how to conduct discovery against a Chinese company you have sued in a U.S. Court. Part 3 will focus on litigation strategies when suing a Chinese company and enforcing U.S. judgments against such companies. Part 4 will discuss arbitrating against Chinese companies and suing them in China.

China Trademarks: The First Thing To Do When Someone Already Has “Yours”

Posted in Basics of China Business Law

It used to be rare for one of our clients to be unable to secure a desired trademark in China because someone had beaten them to it. With the proliferation of trademark filings in China over the last 3-5 years, those halcyon days are over.

When our pre-application screening turns up a conflict with a previously registered trademark, we often suggest that our client determine whether the preexisting trademark has been abandoned. Under Chinese trademark law, failing to use a China trademark in commerce at least once every three years puts the trademark at risk of cancellation. I use the words “at risk” because in China a trademark is presumptively valid throughout its term unless someone files a non-use cancellation against it (or otherwise challenges its validity). Of late, our China lawyers have been fielding a lot of inquiries regarding non-use cancellations.

Before we file a non-use cancellation, we gather up our own evidence regarding non-use, usually using Baidu for the initial search. If something shows up on Baidu indicating that the trademark has in fact been used recently, our work is done and securing a non-use cancellation will likely not be possible. If we do not find anything on Baidu, we generally expand our search until we either find evidence of trademark usage or become convinced that filing a non-use cancellation is the way to go.

Filing a non-use cancellation in China is fast and easy, but as with everything involving the Chinese Trademark Office these days, the rest of the process is often delayed. The good news is that with most of our non-use cancellations, the trademark owner never responds and, once the CTMO processes the filing, the “offending” trademark is cancelled, clearing the way for our client’s application.

When It Helps To Have A China Lawyer: China Trademarks

Posted in Basics of China Business Law, Legal News

A China trademark lawyer friend of mine sent me a Wall Street Journal article the other day, entitled, When It Helps to Have a Lawyer. The email containing the article link read as follows:

Did you see this article? I’m betting that you didn’t because if you had, you would have done something with it. I think what it says about trademarks is even more the case with China than with the United States. Reminds me of when we talked about all the attempted trademark registration f—ups we have seen by American lawyers with no knowledge of China trademarks. Anyway, this empirically backs up what we discussed because if these are the percentages in the United States, the numbers have to be higher for China if we include American lawyers who do not know what they are doing here. You agree right?

I so much agree, that I’m writing this post.

According to the article:

Trademark applicants represented by attorneys are 50% more likely to earn a stamp of approval from the U.S. patent office than those who go at it alone, according to a new academic study.”

The paper’s authors crunched 25 years’ worth of data released by the U.S. Patent and Trademark Office last year to gauge the importance of having legal counsel.

The study … found that on average, 42% of trademark applications filed by attorney-less applicants ultimately were registered. Those who retained an attorney had a success rate of 60%.

Until a few years ago, my law firm did China trademark work, but no U.S. trademark work, simply because we did not believe that any of our lawyers had sufficient U.S. trademark experience. Many clients were surprised when we would refer them to trademark counsel at other firms, and they would often ask how it could be that we knew China trademark laws but not U.S. trademark laws. My answer was that it was because a couple of our China lawyers make it a point to stay current on China trademark laws and because we file hundreds of China trademark applications every year. Now that we actually have a very experienced U.S. (and international) trademark lawyer, we do file U.S. trademark applications, as well as doing other U.S. trademark work, but I have become even more convinced that we were right not to take on such work previously.

I am not aware of any comparable study of China trademark applications, but I am absolutely certain the numbers have to be at least as high. I say this knowing how complicated it can be to register a trademark in Chinaand how often I have had to explain to distraught companies why what they (or their lawyer) did while trying to register a trademark in China was a big mistake.

I recently received multiple emails from China consultants who are writing me on behalf of their American company clients that are having problems with their China trademark filings. An amalgamation of these emails went something like this:

This American company used an American law firm to try to register the following as a trademark in China: Toy Value [Note that I made up this name and changed the industry so as not to risk identifying anyone]

They have just learned that the China Trademark Office (CTMO) has rejected this mark as “too descriptive.” They were then told by their counsel that they should try to register the mark again, but this time for a service, not a product.

I am thinking that you may have a better chance of getting the mark registered in China.

Can you help?

My responses were something along the following lines:

We can help, but I certainly wish that you had come to us sooner as we would have instantly told your client that its trademark application would likely encounter problems with the CTMO.

Your client should have obtained pre-application counseling regarding its trademark and for the goods for which it was seeking to register the mark in China before it sought to file anything. Had they done so, they would have learned that this trademark would likely face problems, and rather than waste time and money filing the application in the way they did, they could have considered alternative filing strategies for the same mark, or considered alternative marks.

Having filed their trademark application in the way that they did, the application was not only rejected, but the failed application might have created a record with the CTMO that could have negative implication for any future application they might file for the same or a similar mark. Pre-application advice almost certainly would have avoided all of this. Right now they are completely lost. We can help, but to do so, we will require that your client essentially start over from the top.

Bottom Line: Securing a U.S. trademark registration is more complicated than most people realize and that is even truer of China trademark registrations. You really should use the right China lawyer for China trademarks.


Your China Expat Employee Contract. It Depends….

Posted in Legal News

Your China expat employees are covered by China’s Provisions on the Employment of Foreigners in China (《外国人在中国就业管理规定》) (hereinafter “the Provisions”). These provisions require you comply with applicable Chinese law regarding such things as working time, rest and vacation, labor safety and health, and social insurance. What is left open to question, however, is whether matters other than those stated above can be agreed to by an employer and an expat in a labor contract. For instance, can the termination of a labor contract be pre-determined by a contract between the employer and the expat employee?

Like virtually everything involving China’s labor laws, it depends.

For example, in Shanghai, the short answer is yes. Since 1998, the Several Opinions Regarding the Implementation of the Provisions on the Employment of Foreigners in China (《关于贯彻〈外国人在中国就业管理规定〉的若干意见》) have been the governing guidelines for Shanghi. According to these written guidelines, a Shanghai employer and its expat employee can contractually agree on the conditions for terminating the employment relationship. Shanghai’s position is that the parties’ own arrangement should generally be respected, so long as the employer and the expat employee have agreed on the contract terms and so long as those terms do not contradict matters covered in the Provisions on the Employment of Foreigners in China.

For those of you who have read some of my previous posts on China employment law, you know that Beijing oftentimes does not “see eye to eye” with Shanghai on employment law issues, such as expat social insurance. And that is the case here. Beijing courts generally believe that China’s Labor Law and Labor Contract Law are by their very nature “public laws,” drafted with the primary purpose of protecting employees. Giving an employer the right to unilaterally terminate a labor contract would impact the employee’s right to employment, Beijing generally ignores employment contract provisions that grant the employer the right to unilaterally terminate employment of anyone, including expats.

Bottom Line: The enforceability of an employer-expat employment contract is going to depend on the city. Shanghai is more likely to abide by contract terms and Beijing is more likely to look to China’s Labor Law and Labor Contract Law. Your mileage will vary when it comes to other cities in China, which is why you should also check first.