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Inexpensive China Lawyers. Really?

Posted in Basics of China Business Law
Want a China lawyer at half price? Good luck with that.

Want a China lawyer at half price? Good luck with that.

Last week I had a long phone call with one of our China lawyers after discussing a very difficult and unusual labor law issue we are handling for one of our clients. Her parting words to me were something to the effect that she would discuss the situation with the appropriate people at the specific China city’s labor bureau, but she doubted that they would have any answers for us. We briefly reiterated how unusual our client’s situation is, implicitly saying that talking with the labor bureau usually provides answers, though it likely would not this time.

And then a few hours later I received an email from someone asking me to refer them to an “inexpensive lawyer” because their firm cannot afford “high priced attorneys.” We used to keep a list of fairly inexpensive Chinese lawyers to whom we would make these sorts of referrals, but we stopped doing that after all of the lawyers on that list either substantially raised their rates or were removed by us after complaints by the companies for whom we had made the referrals. Now my response to these requests is something like the following, which response I sent out recently to a company wanting to set up a international school in China:

There is no such lawyer, or at least none of which I am aware. All of the lawyers I know who could competently handle the tasks you set forth are going to charge well over the amount you want to pay. Virtually all the good business lawyers (in China and in the U.S. and just about everywhere else) are super busy these days and no lawyer becomes expert in something as complicated as international/China/cross-border law to charge discount rates and I am not aware of any that do.

I am not kidding when I say that your best chance for finding someone might be to try to find a small law firm in a less expensive city like Cincinnati or Des Moines or Santiago, Chile, or Kuala Lumpur with a young lawyer that does China work. Those cities have some very good business lawyers who charge less than in the bigger cities in the US and in China and you might be able to find one that does China work and is also be capable of understanding the international/US ramifications of what you are seeking to do.

But what makes your situation even more difficult is that the education industry is a particularly difficult and complicated one for China and we have more than once been retained to clean up other law firms’ mistakes in it and so I strongly caution you against hiring a low-priced lawyer (should you even be able to find one) as he or she may well end up costing you more in the long run.

I am sorry I could not be of more help, but if you do find such a lawyer please let me know so that I can put him or her on our list for the next time.

Then today I just read a blog post by Professor Donald Clarke on his Chinese Law Prof Blog, entitled, Life as an official, from the Inside. Professor Clarke’s post was on an essay he had “just read” by Zhang Xingxiang, a Practitioner-in-Residence at Indiana University’s Research Center for Chinese Politics and Business. The essay was about Zhang Xingxiang’s life as an official in China and Professor Clarke wrote how he “was struck by one observation he [Zhang Xingxiang] made.” The one observation (shortened a bit) is the following:

Although government agencies were required to abide by the stipulations of laws and regulations, the enforcement of laws was a big headache in China. The law itself did not have intrinsic mechanisms to ensure its implementation. The State Council usually issued regulations or circulars which specifying how to enforce the law. Without that, most of time the law was just a written piece of paper posted on the wall but never seriously executed. The Constitution and Legislation Law stipulate the rank of legal instruments: among laws, regulations, rules, circulars and decisions, from highest to lowest. In practice, however, it went in a totally different direction. Whenever companies or individuals had a legal issue, they did not just look up the law, but sought decisions from a mayor, a governor of a province, or even the Premier because they knew such disposition was more effective.

In response to which Professor Clarke observed the following: “Zhang is not the first to observe that the actual hierarchy of norms is virtually the opposite of the formal hierarchy of norms; in terms of actual binding force, for example, the Constitution is far weaker than a rule on, say, severance pay issued by an urban district labor department.”

Professor Clarke then contrasts this with the United States where those who want to comply with the law ask their lawyers who, in turn, review the law and provide their clients with answers. This is quite different from China, where the following is true:

But think about what must be true for this [Chinese] system to work. There must be law for lawyers to become expert in. In other words, there must be a reasonably predictable and unified system of rules. Ad hoc, discretionary decisions by government officials cannot supply this kind of legal environment. Thus, regardless of what we think of ad hoc decision-making from a fairness perspective, it’s important to see that it renders impossible a certain mode of governance that has the advantage, among others, of being a lot cheaper.

I agree. Take the China employment law issue I discussed with one of our China lawyers. She is going to extensively research the issue by reading relevant statutes and case law, just as a domestic United States lawyer would do when confronted with a similar issue relating to U.S. employment law. But after doing that research, there is about a 99% chance she will still need to talk to one or more people at the relevant “urban district labor department” in an effort to determine how that department believes our client should handle this situation. This particular China lawyer of ours has a daily stream of employment law work and virtually all of it requires she speak with the relevant labor bureau. Indeed, in my conversation with the client I made sure to mention that the lawyer I would be assigning to its matter had a lot of experience working with the labor bureau with jurisdiction over our client.

So what this all means is that for China we do the same research that lawyers in the United States would do on a U.S. domestic matter, but in addition to that, we have to gather up our research and discuss it with a labor bureau, half to try to convince that particular bureau to see things our way on the law and half to get its take on the law. If our take on the law fully jibes with the labor bureau’s take on the law, we are done. But if the labor bureau’s take on the law is less favorable for our client than we believe is appropriate, we then will need to work with our client to determine whether to abide by the labor bureau’s view of the law (the safe and more common way to proceed) or to go against the labor bureau because we believe that we are right and because our position is so much better for our client (a way less common and way more risky way to proceed).

This whole portion involving the labor bureau would not be necessary in the United States and probably increases the overall bill by 30%. Not to mention that our lawyer doing the work has a law degree from top schools in both China (Peking University) and the United States (University of Washington) and is completely fluent in both Mandarin and in English, all of which means that she (and us) have no reason to charge her out at discount rates.

So the next time you are wondering why China lawyers tend to be so expensive….

8 Phrases You Should Never Use With Your China Manufacturer

Posted in China Business, Legal News

Jacob Yount just did a very helpful post on outsourcing manufacturing to China. The post is entitled, 8 Phrases to Eliminate in Your China Sourcing, and it calls for eliminating the eight phrases so as to improve your China sourcing successes. Jacob has worked in China sourcing for more than a decade and his tips are good ones. Below I list out in bold Jacob’s eight phrases to ban from your lexicon and then provide my own analysis. At the end of this post, I add a few (more legal) ones of my own.   China Manufacturing Contracts

1.  The supplier should’ve known to do this… Guess what, many Chinese manufacturers do not even know to what use your product will be put. You should assume that they do not know anything but what you specifically tell them and if it is at all important, you should tell them in writing and in Chinese.

2. Why did the supplier not tell us? Consider it your job to monitor and to find out.

3. This is wrong, get it right! I am just going to borrow directly from Jacob on this one: “Provide the factory with evidence, detailed specs and mocked-up photos to show what to correct. If necessary send physical samples.” In other words, it is your job to explain.

4. Your price is super high! Sometimes it is super high because the Chinese factory (for various reasons) wants nothing to do with you. Sometimes it is super high because you failed to explain sufficiently want you were seeking to do. In any event, I agree with Jacob that you should give the factory cost ranges before they price for you.

5. We’re disappointed / angry / unhappy. Just flat out not helpful.

6. We just want it perfect. See my number 5 above.

7. We have to rush these. Do you want it done fast or do you want it done right?

8. This is not acceptable. Explain.

And here my three favorites:

1. Reasonable Quality/Workmanlike Job/Industry Standards/Reasonable Time.  Phrases like these are meaningless in a country where you can buy a t-shirt for 35 cents that will be lucky to survive two washes. I would argue that a 35 cent t-shirt that survives one wash is of reasonable quality for the price. The point here is that there are all sorts of gradations of quality in China that are lower than many of us can imagine and therefore these terms are of no value. I will also note that these terms — unlike in the United States — have no legal meaning.  If you want quality from your China supplier, your written contract should state exactly what that means. If you want a laptop bag strong enough to hold a laptop, you should list out the specific tensile and strength requirements your supplier must provide you to be in conformity with your China OEM Agreement.

2. We will resolve all disputes by working in cooperation with each other. You will? Really? In what world does it happen that every problem between businesspeople gets resolved by their having a friendly meeting or two? We are increasingly seeing this language in manufacturing contracts that are coming across our desk — always after the American side has encountered a major problem and now wants to retain us (rather than before when we would have instantly exorcised this language from the contract). These American companies are telling us that their Chinese manufacturer put this language into the contract and they did not want to challenge it because they did not want to appear to aggressive or to look like they were expecting problems. We read these provisions as an enforceable agreement not to sue under any circumstances.

3. We will base it on our relationship. This one is not a contractual one, but it is one that we often hear. One of our China lawyers will suggest to one of our clients that we put such and such a provision into the contract and our client will respond by saying, “is that really necessary, our Chinese counterpart thinks that should just base that on our relationship?” No, you cannot. The whole reason for writing a contract when the relationship is good is so that you can memorialize things now just in case things go bad.

Any more?

 

Terminating Your China General Manager

Posted in Basics of China Business Law, Legal News

Under China’s labor laws, most employees can only be terminated with cause and a severance payment. But what about terminating a general manager? Pursuant to China’s Company Law, the board of directors may terminate a general manager in accordance with the relevant procedures without cause. Based on this provision, many companies assume that the Company Law, not the Labor Contract Law, controls a general manager’s termination, and therefore all they need to fire a general manager is a board resolution. But it’s not nearly that simple.   China General Manager Law

The basic question is whether a general manager is treated just like every other employee under China’s Labor Contract Law. On the one hand, a general manager is different from other employees: the general manager is in charge of the company’s business operations, manages all of the other employees, and answers only to the company’s directors. In some cities, the general manager must be formally identified during the company formation process. And there’s that provision in the Company Law about termination. On the other hand, China’s Labor Contract Law has no provisions that distinguish general managers from other employees.

Some practitioners believe that even if a company dismisses its general manager in accordance with the Company Law, the labor relationship between the parties continues until the company also dismisses the general manager in accordance with the Labor Contract Law. And at least some courts agree.

Consider the facts of a recent case (simplified a bit for purposes of this post). A company’s board of directors formally terminated the general manager, in accordance with the Company Law, and immediately stopped paying his salary. The company did not assign him to any other position. Subsequently, the former general manager filed for labor arbitration. The arbitration commission ruled that while the board’s decision to terminate the general manager was legal, such decision had not terminated the contractual labor relationship. As a result, the company was required to pay back wages for the period between when the general manager was fired and when he submitted the dispute for arbitration. The commission further ruled that because the general manager had not provided any services after being terminated, the amount of back wages owed would be those of the average wage at the office (and not, as the general manager had argued, his previous salary). The company appealed, and a court upheld the arbitration commission’s decision.

Although this case has no precedential value, employers should take note. Until Chinese courts provide clearer guidance on this issue, the safest path for companies is to treat their general managers just like other employees, and terminate them in accordance with both the Company Law and the Labor Contract Law. Failure to do so could be disastrous for the company, because if the termination of a general manager is deemed wrongful under the Labor Contract Law, the employer could be forced to hire back the general manager and pay back wages to boot.

When terminating a general manager in China, make sure you know what you’re doing.

China Employment Law: A Memo On The Practicalities

Posted in Basics of China Business Law, Legal News

In cleaning out my computer this weekend, I came across this memo from one of our China lawyers (who does a substantial amount of China employment law work) to a client from nearly two years ago. I gave it a quick read and near as I can tell most of it is current. The only things I would note are that the rules can and do vary from province to province and from city to city and that in some cities it is relatively easy to secure permission to have your employee work without having to pay overtime.  China Employment Laws

I am writing in response to your recent email regarding ______’s China employment matters. The basic response to your questions on PRC employment law are as follows. As you can see, the regulations are quite complex. Please contact me if you would like more detail on these matters, or if you have other related questions.

1.   In general terms, Chinese law does not allow for “comp time.” Calculation of work time and payment is regulated under the PRC Labor Law劳动法. Article 36 of the China’s Labor Law provides for an 8-hour workday and a 44-hour workweek. Article 44 of the Labor Law provides that any labor performed in excess of the statutory amount must be compensated at 150% of the base salary. If the employee works on a normal rest day (Saturday afternoon or Sunday), then pay is 200% of base. If the employee works on a national holiday, pay is 300% of base. It is not permitted to make up for excess time worked by providing time off in the following week. The statute is silent about adjusting work hours within the same week and many companies will say that if an employee worked 12 hours on day one, that employee can then work 4 hours on day two. Though this is a somewhat common practice, particularly among Chinese companies, this system violates the rules. Under the strict interpretation of the rules, if an employee works 12 hours, 8 hours is at base pay and 4 hours must be paid as overtime. For these reasons, most WFOEs have a very strict rule limiting overtime work. That is, no employee is permitted to work overtime without specific written permission. “Comp time” systems are generally not used in China by foreign companies because they violate the rules and we do not recommend our clients use such a system.

2.   Chinese labor law recognizes that for certain times of employment, a regular, 44-hour workweek, 8-hour day simply is not practical. For example, employees who work in transportation (on trains for example) and employees who work as travel guides will never work a standard week or day. For such employees, permission can be fairly easily obtained from the local labor bureau to establish a system of flexible work hours and accumulation of hours system. This permission system is regulated by the Labor Bureau Method for Enterprise Application for Non-Specified Work Hours and Gross Accumulation of Hours劳动部关于企业实行不定时工作制和综合计算工时工作制的审批办法.

Under this system, a company can work with its employees to design a system where hours are accumulated within a week or month in a flexible way that fits with the actual demands of the job. However, the basic rule of this system is that the final result must be as close as practical to a 44-hour workweek and an 8-hour workday. This system cannot be used to impose a non-hourly work system where the employee is paid a monthly salary and is required to work as many hours as are required to get the job done. That is, this system cannot be used to impose a salaried employee system as an hourly employee system. There is no concept of salaried employee under the Chinese labor law system. There is only the method described here where the hourly system is adjusted in a way to accommodate employees who have irregular work hours as an inherent part of their jobs.

Consider the application of the above to your employees.  Many of your sales employees will travel. You have two choices that comply with the law. First, absent special permission, you are required to pay overtime for every hour in excess of 8 hours that the employee works, even in cases where the excess hours are caused by travel that cannot be avoided. Second, if this is an excessive burden, you can request permission from your local labor bureau to implement a flexible system to allow for excess time on certain days to be made up as soon as possible by time off on other days, provided that the result is as close to an 8 hour day, 44 day work week as possible. In general, the employees must agree to this system: it cannot simply be imposed by the employer.

3. You have asked about the system for paying your general manager. This question applies to management employees in general. What you are really asking is whether or not you can pay your management people using the standard U.S. salaried employee approach. As noted above, the legal regime in China does not recognize the salaried employee concept. This means that for you to avoid paying overtime to your management personnel, you will need to obtain approval from the local labor bureau for an alternative payment system for these employees. However, as I have stated, the rules do not allow for an open-ended, salaried employee approach. Rather, the rules are designed to deal with workers whose jobs require an irregular hourly pattern of work. The rules quite specifically exclude the concept of open-ended, work as long as it takes to get the job done systems of compensation. For this reason, applications to impose this kind of salaried employee system are generally not granted by the local labor bureaus, but this does very much depend on the specific local labor bureau.

This whole approach is, of course, not consistent with the way modern companies are managed. The Chinese labor law system does not make any distinction between the factory line worker and the president of the company that owns the factory. By law, and absent approval, both the line worker and the president must be paid using the same rigid hourly wage system. The fact that this is entirely unrealistic means that most companies in China simply ignore the rule for management employees and for sales and other employees who inherently work irregular hours.

However, simply ignoring the law is not a sound strategy for foreign owned companies. When the law is ignored, the result is that the company is subject to large overtime claims from disaffected management and sales employees, and we see this happen all the time after an employee has left the company or is terminated. This issue arises quite consistently when foreign companies terminate a management-level employee. It is an unpleasant shock when the company learns that the manager it just terminated has been carefully accounting for unpaid overtime all along and insists on getting paid all back overtime wages, plus interest on those wages, plus penalties, all in addition to a claim for an already large settlement payment.

 4.  The Chinese labor law system for vacation time is regulated by the Regulations for Employee Vacation with Pay职工带薪年休假条例. Article 3 of these rules provides that vacation with pay is mandatory, in accord with the number of years of employment, according to the following schedule:

– 1 year to 10 years employment: 5 days vacation.

– 10 years to 20 years employment: 10 days vacation.

– Over 20 years employment: 15 days vacation.

 Article 5 provides that vacation must be taken in the year accrued. That is, vacation cannot be accumulated and rolled into subsequent years. If the company cannot provide vacation due to the needs of the company, then the company must pay 300% of base salary for every vacation day denied.

Most foreign owned companies have a vacation policy more generous than required by Chinese statute. It is permissible to impose any vacation policy more generous than the Chinese required system, but not one that is less generous. The most contentious area is accrual of vacation. In general, it is considered permissible to allow for accrual and roll over of vacation time if this is the specific desire of the employee. You should note, however, that the regulation is silent on this issue. The Chinese government is concerned that employers will pressure their employees not to take vacation and to accrue the time when this is not really the intent of the employee. Therefore, the regulation favors payment of the 300% of salary as a way to control the actions of the employer.

Most employers simply use whatever U.S. vacation policy they have in place as their policy for China, though this is not always the best plan. It is better to adopt a vacation policy that complies with the Chinese system, with additional benefits on top of the Chinese system if that is considered desirable. Note also that the vacation policy should apply to all employees. Some companies will apply the policy only to management personnel. This is not acceptable under Chinese law.

5. Many Chinese-owned companies ignore the requirements of the Employment Law and the associated regulations. It is therefore common for Chinese staff of foreign owned companies to recommend that you too ignore the rules. However, this is not a good strategy for foreign companies. When a complaint is raised, the local labor bureaus are quite aggressive in enforcing the strict requirements of the labor system against foreign owned companies. and this type of enforcement is becoming more common, not less. Accordingly, even when the rules are difficult to deal with, you must be sure to follow them as closely as possible. Also, the employee who told you not to follow the rules will not hesitate to sue you for not following the rules, when doing so suits his or her purpose later on down the road.

Don’t Sleep on Your China Trademark

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

Was it George Santayana or Bill Paxton who said: “Those who cannot remember the past are condemned to repeat it”? Although the line was not about Chinese trademark law, it might as well have been. We have been beating the drum for years about registering trademarks in China (see here, here, and here for a representative sample), but every time I start to think that the subject has gone stale, a bunch of new matters come in that prove me wrong.

When people run into problems with China trademarks, it can often be traced to one of three related misconceptions.

Don't Wait to Register Your Trademarks in China

Don’t Wait to Register Your Trademarks in China

The first misconception is that a trademark registration in the U.S. or EU or some other jurisdiction will provide some protection in China. There is no such thing as a worldwide trademark; every country has its own trademark system, and your US trademark has no bearing on your trademark rights in China. (The one exception in China is for well-known brands, but this exception is so limited as to be meaningless. Starbucks had to litigate for years to prove that it was a well-known brand, and even that was not a slam dunk.)

The second misconception is that if a third party registers “your” trademark in China, you will be able to get it back by showing that you used it first in China. China employs a “first to file” system for trademark registration, with virtually no protection for unregistered trademarks. In this respect, China’s trademark system is the opposite of America’s, where you gain some trademark rights by usage alone. In China, anyone can register “your” trademark and prevent you from using it, even if they are not even using the trademark. This happens all the time and it is legal under Chinese law. If someone else registers “your” trademark first, that makes them (not you) the rightful owner of that trademark in China—and if you attempt to sell goods in China bearing that trademark, then your goods could be seized because you are the one violating China’s trademark law. It’s not a bug, it’s a feature.

The third misconception is that if one of your Chinese competitors registers “your” trademark, you will be able to invalidate the registration on the basis of bad faith. Although last year’s revisions to the Trademark Law theoretically strengthened the requirement that trademark applications be made in good faith, the Chinese Trademark Office still has a narrow conception of what constitutes bad faith. In the vast majority of situations, your only hope of successfully challenging an existing registration on a bad faith claim is to show that the owner of “your” trademark is (1) a business partner or (2) a serial trademark squatter. And even those two methods are far from foolproof. To show that someone is a business partner you need to prove that you had a business relationship before they submitted the trademark application — and without any possibility of court-ordered discovery, such proof can be elusive. It is equally difficult to prove that someone is a serial trademark squatter. If they have registered several hundred trademarks and do not appear to conduct any business related to the goods and services covered by those trademarks, then you have about a 50/50 chance.

If the owner of “your” trademark is just a Chinese competitor — which happens all the time, because who else knows the business better? — then your options are highly unappealing: (1) buy the trademark from the competitor at a usurious price; (2) go into business with the competitor on unfavorable terms; (3) pick a new trademark and rebrand; or (4) stop doing business in China. The competitor has no incentive to do anything that would actually help you. We recently handled a matter in which a Chinese company had registered the names of its three largest non-Chinese competitors, effectively taking those companies out of the market in China for a few years, at least under their own names.

If you care about what happens to your IP in China, then you need to register your trademarks in China now. The Chinese trademark system only helps those who help themselves.

China VIEs Are Dead And I Told You So

Posted in Legal News

The Wall Street Journal just published an article on the threat of the proposed PRC foreign investment law on major companies in China that have used the VIE structure to enter into prohibited business sectors. Among the companies in the cross hairs are a number of major foreign businesses such as Amazon, Pearson and CBS. Add to that the Chinese Internet giants Sina, Weibo, Alibaba, Baidu, Tencent and Youku and you pretty much have the entire Chinese Internet sector lined up on the firing line. The Journal seems to be treating this as a shocking new development.  China VIEs

But none of this is new. In fact, I told you so, as the below posts (which are just a sampling) reveal.

1-22-2015 China VIEs Are Dead. Done. Over. Stick A Fork In Them.

6-3-2013 China VIEs. Avoid, Avoid, Avoid.

10-10-2011 VIEs In China. The End Of A Flawed Strategy.

In the 2011 post, I vehemently set forth the proposition that VIEs are to be avoided as illegal:

None of this is actually new. These risks have long been known. However, the clarity of the Regulations means it is now nearly impossible to claim that Chinese law on these issues is ambiguous or unclear. Where Chinese law says that ownership by foreigners is restricted or prohibited, the law means what it says. Foreigners who invest in violation of the law are making a bet that the violation will be ignored. This is extremely unlikely in today’s China. Such bets are sucker’s bets and should be avoided at all costs.

We have been speaking out against VIEs for years and just about every time we do so, someone says that if they are illegal, why have so many large law firms, large accounting firms, and large companies gone along with them? The answer is simple. Money. Big money. Really big money. Now, some of these same law firms and accounting firms and companies are denying that anything has changed. And why is that? Again, money. Only this time they are taking positions not so much to make more money going forward, but to avoid losing through lawsuits the money they have already made.

The big time business press is now picking up on what I have been saying for years: the VIE structure is illegal, its underlying contracts are void, and the VIE companies will now be required to either restructure or shut down. Foreign investors will lose a lot of money and the Chinese side will come out on top. This all makes me wonder why it was that so many kept insisting that China would permit foreign companies to operate illegally in China for an extended time period

It is important to understand how this will all come down. Over the years analysts have said that there is no real risk with VIEs because the Chinese government will not want to shut down these major players in the Internet and e-commerce sector. The Journal article above repeats this. The problem with this proposition is that it misses the real threat.

First we need to consider the background. The fact that the Internet/e-commerce companies are big and profitable is not relevant. The Chinese government does not care about this. What the Chinese government cares about is that its Internet and e-commerce sector is right now dominated by foreign investors and it does not consider that to be a good thing. At all. To understand this basic attitude, check out my recent posts on China File.

On the other hand, the Chinese government understands that China requires a powerful and well run Internet as this is a prerequisite for a modern and powerful state. Thus, the Chinese government has no desire to shut down the foreign controlled internet; but it does wish to regain control over it. The Chinese government likely will accomplish this in two stages:

First, the truly foreign owned and controlled VIEs such as the Amazon and Pearson ventures will be required either to shut down or transfer their assets to Chinese entities.

Second, the majority of VIEs formed by Chinese entities will be required to restructure by buying out their foreign investors at what will likely be fire sale prices.  The goal here will be to put Chinese citizens permanently in control of what are nominally public entities. This is apparently the path currently being forged by Alibaba and Baidu.

In either case, the foreign investors will be squeezed out of VIEs and those VIES will then come under the control of Chinese persons and entities. The result of this mandatory sale will be a destruction in value for the foreign investors. In other words, the money invested by the foreign investors will essentially be “gifted” to the Chinese people. Sorry.

 

 

The Fake China Law Firm Scam

Posted in Legal News

Fake China Lawyers

Way back in 2006, I wrote about fake China law firms in China  Where Even The “Law Firms” Are Fake. In that post I talked about fake Chinese lawyers taking money from American companies for trademark registrations:

There are those who take money to file trademarks in China and then simply run away. A new client told me he had sent about $750 to what he thought was a legitimate China law firm to have his company’s brand name registered. As soon as the first $750 hit Shanghai, he was asked to send an additional $600 to “cover the filing fees,” which he did.

A week later the website was down and the Shanghai “firm” was gone, “leaving no solid clues, nor trace, only a space in the lives of their friends.”

*    *    *    *

It turns out this scam is actually pretty common and it also turns out that in every case of which I am aware the scammers were neither licensed Chinese lawyers nor licensed Chinese trademark agents. In other words, they are just people who run China trademark registration scams.

We should have written more about fake legal providers in the interim because since 2006 I have heard multiple accounts of U.S. companies that paid for trademarks and employment contracts and company registrations and various other things that China lawyers typically do for their clients, only to receive nothing in return and only to learn that the “law firm”or the “lawyer” to which they paid the funds never even existed. How many U.S. companies believe that their trademarks are registered in China when in fact they never were?

Then in 2007, in NEWS FLASH — Mongolian Law Firm Clones Famous China Lawyer, we wrote about a Mongolian firm that claimed that Steve Dickinson, who heads up our China law practice in China, was an attorney at a Mongolian law firm. Our blog post shamed the firm into removing Steve’s picture and bio (taken straight from our own website).

Well now we are learning that fake law firms and stolen bios and photos have become an international phenomenon. The ABA (American Bar Association) Journal just did an article on this, entitled, Fake law firm websites use real firms’ photos and info, but alter contact details. It begins with this:

A smiling man in a business suit pictured on the Dovernor Chambers website in a wood-paneled office looks like a seasoned legal practitioner, and is.

However, he actually is a U.S. lawyer practicing in Kansas. The Dovernor Chambers firm—which purports to operate in the United Kingdom—is fake, and its website contains photos lifted from other law firm websites to create a convincing online presence to scam would-be legal clients, the Mirror reports.

Such schemes are common and increasing. The Solicitors Regulation Authority says it is identifying a new fake law firm on an almost daily basis. Some scammers reportedly are stealing a law firm’s entire Web page, then changing the contact information to redirect traffic elsewhere.

I want to emphasize that we have absolutely no reason to believe that any licensed China licensed or U.S. licensed lawyer has had any part in these schemes.

So how can you avoid this happening to you? Check to confirm that the lawyer(s) you are using actually has a law license. That alone ought to solve all of your problems. I believe that every U.S. state lists its licensed practitioners online and avvo.com also lists all or nearly all licensed lawyers. Here is my proof on Avvo that I am a real lawyer, licensed in Alaska, Illinois, and Washington. Do some due diligence before you pay/hire a China lawyer, especially if you will be paying upfront for something like a China trademark or a China company registration where it may take you years to realize that you have been had.

 

Qualifying Your Chinese Supplier: Some Basics

Posted in China Business

Finding a China product supplier has never seemed easier. We now have a whole host of both foreign and Chinese online services to speed up this process for you, the buyer. It’s almost like speed dating.

However, as with beginning any serious relationship, you should take it slow.

Qualifying your China product supplier

Qualifying your China product supplier

We have warned you before (here and here) about the danger of buyers being seduced by the ease of finding Chinese suppliers online to the point of not conducting sufficient or any due diligence. What exactly do these online product “matching” services do to “verify” suppliers and to what extent can you rely them? Though there is assuredly a variety to the process the various online companies use to to promote “top suppliers” to you, it is important to know what that process is:

  • Is the supplier merely purchasing a more expensive advertisement package with better search result placement?
  • Is anyone visiting the suppliers in person?
  • Does the customs data provided trace back to the actual factory that produced the product or to a broker?
  • What is the legal name and banking preferences of the company that will eventually invoice you?

For all but the smallest purchases, we encourage companies that are outsourcing manufacturing to China-based suppliers to do the following:

  • Do some hard work yourself. Spend the time to travel to go and see the potential factory and to meet people face to face. As we wrote in  China Business Due Diligence, when you visit, take special notice of everything: factory details, names, signs, materials on site, etc.
  • Bring a Mandarin speaker with you that you trust. This person should not actually be one of the parties in the deal, and it is best if you can arrange for a stealth translator.
  • Conduct thorough research on the potential supplier before you sign anything. Know the exact Chinese company that will sign the contract, who actually owns the company (and its parent company), and get copies of all company documents and certifications, including the Legal Representative’s ID. Do not be afraid to physically inspect the original ID, as this is what Chinese businesses do.
  • Confirm how payments will be made. Make sure the bank account information provided matches the company name. Also, understand if you will be paying a Mainland or Hong Kong bank, and what the ramifications are of that choice.
  • Don’t get too excited. Taking it slow means seeing through the dinners and nice words, and not getting caught up in ceremony and platitudes and the thrill of doing business internationally or in greatly reducing your costs. Be polite, but do not being easy. These guys are pros at working Westerners, and you just gotta keep your head.

Moving too fast results in only the Chinese partner being rewarded. It’s never the other way around.

China Consultant Or All Knowing China Expert

Posted in Basics of China Business Law, Legal News

China’s recently stepped up efforts to root out unregistered foreign businesses in China has caused a rash of China consultants to retain the China lawyers in my firm.

From our work in forming China WFOEs (wholly foreign owned entities) for these consultants, we have discovered that many China consultants are falling dangerously short in various other legal aspects of their business as well. Indeed, if we were to single out the foreign businesses in China most often guilty of underestimating their legal risks, it would be China consultants. China consultants seem to have been in China so long that they seem to have forgotten that when push comes to shove (or as lawyers like to say, when a deep and easy pocket needs to be found) they are the American/British/Canadian company that is will to need to answer for what happened. These China hands also seem not to realize just how much China has changed in the last decade and that doing business in China today is not the same as it was five years ago. Not even close.  China Consultant

If you are a Western consultant hired by a Western company to assist in China, you must realize that if something goes wrong for your client you will be your client’s first choice for legal redress. You will be the one that they sue.

What can go wrong? And what can you as a China Consultant do to prevent or ameliorate it? Overall corporate planning to protect your personal assets is an absolutely necessary first step. Beyond that however, and more specifically to China, you can do a lot to protect your client and thereby protect yourself.

We have seen the biggest problems with sourcing consultants that assist in finding Chinese manufacturers. A typical sourcing project, might go like this:

  1. A western company retains a product sourcing consultant to find the best Chinese widget manufacturer in terms of cost/quality/dependability.
  2. The product sourcing consultant requests and secures sample widget from manufacturer.
  3. The product sourcing consultant meets with countless Chinese manufacturers in search of the best one.
  4. The product sourcing consultant recommends that company Z in China manufacture 100 million widgets.
  5. The product sourcing consultant is to be paid a percentage of the manufacturing costs.
  6. Chinese Company Z starts manufacturing the widgets

By this point, I am guessing the sourcing consultants out there are saying, “yes,” while the China attorneys out there are apoplectic. Let’s deconstruct this hypothetical project and note where the consultant has potentially harmed its client and needlessly taken on huge liabilities.

1. The sourcing consultant agreed to find the best widget manufacturer. Is that the best in China or the best in the world? What if the widget manufacturer charges one hundred dollars a widget for the 100 million widgets, but your client’s competitor finds another widget manufacturer who makes equivalent quality widgets for ninety dollars each. Are you liable for the difference? Even worse, what if your client’s competitor gets the same Chinese widget manufacturer to do his 100 million widgets for ten dollars less? Do you really think a US jury is going to believe you were doing your best when your fee was a percentage of the final costs? Are you responsible for the Chinese manufacturer’s late deliveries? For the Chinese manufacturer’s bad product? Is it clear exactly on what your percentage is going to be based and have you set things up so that your client cannot just go around you? The Solution: Make clear by way of a well-crafted written contract exactly what you are doing and not doing. Put in a non-circumvention provision to make sure you get paid and that your client cannot go around you.

2. If you take a sample to China and start showing it to potential manufacturers without FIRST having put in place various safeguards, you are courting disaster. Your client’s sample could be used for counterfeiting and the trademark on the sample (or your client’s name) could also be stolen. Do not think this cannot happen to you as this sort of thing happens all the time. On many occasions we have had sourcing consultants call one of our China lawyers after having learned that one of the manufacturers to which it had shown a sample was now manufacturing the product for someone else using the sourcing consultant’s client’s trademark. The Solution: You should never show a sample or product plan to anyone in China (or probably anywhere else for that matter) without first making the manufacturer sign a non-disclosure agreement (NDA) or, better yet, an NNN Agreement (non-compete, non-circumvent, non-disclosure).  You also must make sure not either not to reveal any trademark information at this point, or register the trademark in China BEFORE you hit the ground in China. The same holds true if patent or copyright protection is necessary.

3. You as the consultant must do more than simply negotiate the price and delivery dates or at least make very clear in writing that these are your only tasks. Typically, product sourcing consultants oversee the OEM contract with the manufacturer and by doing so, they face major liability issues if that contract is not up to snuff. You are the “China guy” and your client is counting on you to guide it through China’s business minefields. You are the one who is supposed to know anything and everything about what it takes to do business in China and nine times out of ten, you sold yourself to your client as a China expert and that is exactly how your client views you. Your client probably thinks that its existing patents, trademarks and copyrights will protect it in China, but a court will expect you as the China expert to know better. The Solution. Put in writing with your client that you will not be providing it with legal advice and that it will need to retain its own China lawyer to draft the OEM agreement with the Chinese manufacturer and to register its IP in China so as to protect it.

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

Short Work Stays In China: Work Visa Now Probably Required

Posted in Legal News

In November 2014, China’s Ministry of Human Resources and Social Security (“MHRSS”), Ministry of Foreign Affairs, Ministry of Public Security, and Ministry of Culture jointly published the Circular on the Issuance of Interim Processing Procedures Regarding Foreigners Who Enter China to Complete Short-Term Tasks (人力资源社会保障部 外交部 公安部 文化部关于印发《外国人入境完成短期工作任务的相关办理程序(试行)》的通知), effective January 1, 2015. In this post, I highlight a few key aspects of those Processing Procedures.   China Visa for Short Term Work

According to the Processing Procedures, if a foreigner comes to China to complete a short-term work task and stays no more than 90 days, he or she must get a work visa (a/k/a a Z visa). The Processing Procedures define a “short-term work task” as one of the following:

  • Completing tasks such as those involving technology, scientific research, management and guidance at the place of the China partner
  • Participating in athletic tryouts at a China sports institution
  • Shooting films, including advertisements and documentaries
  • Performing in fashion shows, including car models, and shooting print advertisement.
  • Participating in foreign-related commercial performances
  • Other circumstances as identified by MHRSS.

The Processing Procedures specifically exclude the following as short-term tasks:

1. Providing services such as maintenance, installation, commissioning, disassembly, guidance or training associated with the purchase of machines and equipment

2. Guiding, supervising and inspecting a China project won in a bid

3. Being seconded to work short-term at a China branch, subsidiary or representative office established by a foreign company

4. Participating in most sports competitions

5. Working as a volunteer for free or even though paid, payment is received from a foreign entity

6. Participating in commercial performances not noted as “foreign-related commercial performances” by the relevant cultural authorities in the approval letter

A foreigner coming to China for no more than 90 days to complete tasks in categories 1-4 (directly above) needs an M visa (visas issued to those invited to China for commercial and trade activities) and those coming for no more than 90 days to complete tasks in categories 5-6 needs an F visa (visas issued to those invited to China for exchanges, visits, study tours and other activities).

Before a foreigner can come to China to perform one of the short-term tasks stated above, the foreigner must take the following steps. First, the China partner (the entity/institution/etc. that invites the foreigner to China) must apply for an employment license and a work certificate, which generally requires submission of the following documents: the China partner’s business registration certificate and organization code, a cooperation agreement/project contract between the parties, the resume of the foreigner who is applying for the work visa, the foreigner’s passport or other valid travel document. If the task to be completed involves technology, a certificate that proves the foreigner’s academic degrees or skills is also required.

The second step is for the China partner to apply for a work visa invitation letter. Next, the foreigner needs to apply for a work visa at a Chinese embassy or consulate, usually by submitting the employment license approval letter and work certificate, the work visa invitation letter, and the foreigner’s passport or other valid travel document. If the foreigner is staying in China for over 30 days (but no more than 90 days), he or she must also obtain an alien residence permit.

Bottom line: If what you are planning on doing in China falls under the above-mentioned definition of “short-term work tasks,” a business visa is probably no longer sufficient and you would need to obtain a work visa.