China LawyersI often internally cringe when listening to someone back from their first two week trip to China. Those people virtually always come back raving about the place and talking as though it is flawless. Some amazing combination of Paris and Fiji or something.  That’s fine, but what too few seem to realize — and which I am going to have to write about somewhat elliptically for this to stay up on the net — is that at its heart, China can be a risky country. I am not telling anyone to be afraid or not to go there, but I am saying that it ain’t Kansas.

Directly and indirectly from people who call the China lawyers at my firm and from friends who live in China and from what I read, I am sensing there has been an increase in foreigners getting into legal trouble in China. Criminal trouble. Yes, in nearly all of these cases these foreigners did something stupid . . . but still.

Let’s ignore fault and blame for now and get straight to practicalities. Do not contest your cab fare and then get into a an argument with your taxi driver in China. Because if you end up coming to blows, there is a decent chance you will end up in jail and there is even some chance you will end up in jail merely for not paying. I do not know what the odds are in either situation but I do know that it happens more than most people realize.

The same is true of bar fights. In many countries the police will take both inebriated fighters to jail and release them a day or two later. But in China it is not unheard of for the foreigner to face years of prison time.

What should you do to prevent these sorts of problems? One, let it go. You’ve been scammed out of ten dollars? Put that in perspective and move on. You’ve been dissed by some loser at a bar? Walk away. Disarm that person with humor. Be the rabbit. Two, if you are arrested and given an offer that will involve you quickly getting freedom, consider taking it, because it probably will be the last offer you get. And whatever you do, don’t believe it will all just eventually pass over, because if anything it will get worse. Your Embassy or Consulate will usually do whatever they can to help you, but that oftentimes consists of little more than alerting your relatives and giving you a candy bar or two. It’s not that they don’t want to help or are unwilling to help, it’s just that legally there is very little they can do to help.

Whenever we write posts like this we get comments and/or emails accusing us of deliberately scaring off people so as to pad our own pockets. Wrong. Our pockets get padded the more people go to China, not the less. No, we write posts like this because we do not want to see foreigners (mostly young foreigners) get into trouble in China. So don’t. Please.

There are all sorts of other ways foreigners can and do find themselves behind bars for doing things they never realized could lead to criminal prosecution, and the below posts detail some of them:

Your thoughts?

UPDATE: On a somewhat related topic, Foreign Policy Magazine just came out with a hard hitting article on hostage taking to ensure debt repayment, entitled, Hostage Taking Is China’s Small-Claims Court: Everyone in China — including the police — treats kidnapping as just the price of doing business. Wow.

China trademark lawyersThe New York Times has a story today on Donald Trump’s trademark filings in Greater China, entitled, Trump Company Moves to Protect Brand in Chinese Gambling Hub. And here is something I never thought I would say: there is a lot to be learned from how Donald Trump (or at least one of his companies) is handling things, with respect to China trademarks anyway.

According to the NYT article, “the company that manages the Donald J. Trump brand has moved to protect the name in Macau” by filing for trademark protection there. There are at least five things to be learned from Trump’s Macau trademark filings.

The first lesson to be learned from is that protecting your brand name via trademark registrations in the PRC does not protect your brand name in Macau. To protect your brand name in Macau, you must register your brand name as a Macau trademark. This also holds true for Hong Kong and Taiwan. As I wrote in China And Hong Kong Trademarks. Think Puerto Rico, Mainland China, Hong Kong, Macau, and Taiwan all have separate and independent trademark systems:

Hong Kong and China are the same way [as Puerto Rico and the United States]. And Taiwan and Macau too. I am constantly having to explain this to our clients, at least half of whom just assume that a trademark registration in the PRC operates as a trademark registration in Hong Kong and vice-versa. And who can blame them, since Hong Kong is one with the mainland, right? Same with Macau, right? Many have this same view regarding China and Taiwan as well. None of this is true.

If you want your brand or mark registered and thus protected in China, Hong Kong, Macau and Taiwan, you must register them in China, Hong Kong, Macau andTaiwan. If you thought you were protected in more than one of these places simply because you had registered in one, you had better get moving and start registering in one, two, or three more.

The New York Times article goes on to note that Trump’s filing for trademark protection for Trump hotel and casino brand names in Macau does “not necessarily indicate that President Trump or the Trump Organization will eventually open a Trump hotel or casino there.” This gives rise to the second lesson, which is that it often makes sense to register your brand name as a trademark in China (and elsewhere) even if you are not doing any business there, at least just yet. China is a first to file country, which means that whomever registers “your” brand name there first gets it. So if you are thinking you will be selling your product or your services in China say three years from now, it probably makes sense for you to register your brand and your logo as trademarks there now. See Register Your Trademark In China: Now. Just Ask MikeChina Trademark Basics and Register Your China Trademark Now. Then Register It Again With Customs.

The third lesson to be learned is the need to make sure your trademark registrations are both current and include sufficient classes to truly protect you. Our China trademark lawyers are constantly getting contacted by foreign companies seeking IP protection based on their trademark filings, only for us to have to tell them that gaps in their trademark registrations are big enough for rival companies to drive a truck through or even that their registrations have expired or never existed. The article notes how Trump’s company already owns more than a dozen trademarks in Macau (for casinos, constructions, hotels and real estate) and it is not clear whether it is adding to that total or just re-upping existing trademarks. For the need to stay on top of your trademark filings, check out New Year’s Resolution: Check Your China Registrations. Just last week I got a call from a U.S. company that four years ago paid a company in China to register three of its trademarks there and just learned that despite having received “official confirmation of the approvals,” no such filing was ever made. Needless to say the Chinese company (a fake law firm) that did this no longer shows up on the web nor probably ever really even existed. See Is Your China Lawyer Real? I have no doubt Trump is using a real law firm for his filings.

The fourth lesson to be learned is that once you secure your trademark registration you monitor it to make sure nobody is treading on it and if they are, you do something about it. The article notes how Trump last year “won a legal battle with a Macau company that had registered to use the name ‘Trump’ in coffee shops and restaurants.”

 The fifth lesson is that you should consider securing a trademark that protects your brand in both the English language and the local language. The article notes that Trump’s registrations “include ‘Trump,’ ‘Donald J. Trump,’ ‘Trump Tower,’ ‘Trump International Hotel and Tower’ and ‘Chun Pou’ — a Cantonese version of Mr. Trump’s name.”

Chun Pou, who knew?

Getting money out of ChinaOur China lawyers have of late been getting a massive upsurge in emails and phone calls from American and European companies and lawyers seeking our assistance in determining the strength of their claims for getting paid on indemnification or settlement agreements or for breaches of investment or merger contracts. China’s tightening of capital controls has made getting money out for these things difficult. To get a better sense of the issues related to China’s crackdown on money leaving the country, start with Getting Money Out of China: It’s Complicated, Part 6 and read the first five parts of this series also. And if you think this is not going to get even worse, I urge you to read China regulators plan to crack down further on overseas deals.

A problem in these situations is that the Chinese government may be preventing the money from leaving or perhaps the Chinese company simply has decided it does not want to pay and is using “China government capital controls” as a convenient excuse. Another problem in these situations is that it can be difficult — often impossible — to know whether payment is not occurring due to the fault of the Chinese company or because the Chinese government has blocked it.

Chinese companies virtually never carry insurance for indemnification or for most (pretty much all) sorts of settlement payments and we are skeptical about their getting permission from the Bank of China to convert RMB into dollars for these kinds of payments. This means your odds of getting money for these things are not so good to begin with, but in every instance in which we have been contacted, the American and European companies (and their lawyers) have already done things to reduce their odds of ever getting paid. In most of these cases, our “sense” is that the Chinese companies deliberately had the contracts written to make payment difficult. And why not? What company that has been sued and had to settle for millions of dollars will not try to set things up so that it does not actually end up having to pay? This holds true with equal force on the indemnification side as well. And on the transactional side, Chinese companies tend to encourage contracts that make payment difficult, figuring that if they do end up wanting to complete the deal, they can agree to a revised contract that will make government approval of payment more likely.

We are seeing this problem of non-payment quite often these days in investment deals as well. The Chinese side will enter into an agreement with a foreign company to buy that company or invest in it. The contract will require the Chinese company make an X dollar (or Euro) payment at some early stage and it oftentimes will also include a liquidated damages provision setting forth what will happen if the deal does not close. The Chinese company never makes the first payment, claiming the Chinese government is not letting them do so. The American or European company then wants to sue for breach of contract damages (one company that contacted us even went bankrupt waiting to get paid!) and/or for the liquidated damages. These companies and lawyers often come to the China lawyers at my firm expecting us to bless their pursuing litigation against the Chinese companies, but in most instances, we throw cold water on those plans by pointing out how the applicable contract(s) make prevailing and collecting on any claim difficult or even impossible.

We typically see two main problems in these contracts, one of substance and one of procedure. The substantive problem is that the contracts’ force majeure clause broad enough to be able to claim that their inability to pay due to Chinese government capital controls is a force majeure. And if the American/European company cannot prove non-payment is for some other reason — and as I stated above, this is usually not possible — the Chinese company may very well prevail on this argument. For more on this issue, check out China Payment Risk. And for some ways you can reduce these risks, check out China Payment Risk, Part 2. The typical procedural problem is the dispute resolution clause. See e.g., Enforcing US Judgments in China. Not Yet.

For you to be able to get paid from China in the situations described above, you need to think about how that is going to happen before you draft your contract, not after you have not been paid. This holds true for any sort of contract with a Chinese company that involves payment leaving China. You need to draft these contracts with extreme sensitivity to China’s hard currency controls, otherwise the Chinese company be able to point to the Bank of China as its reason for not paying and then what can you do? You should not enter into any agreement, even one that seems “purely domestic” without accounting for the payment from China issue and for what is required to get paid under Chinese (not domestic) law and practice.
China employment law guide
Want to know more about China’s employment laws? Buy the book.

One of the most important things you should know about China employment law is that employees have many rights that they cannot contract away. For an example of this, see China Employers: Pay Your Employees on Time to Avoid Lawsuits and Penalties. China employee working hours is another good example of this.

As I have written previously, most China employees can only work under China’s “standard working hours system,” and in most places in China, that means a 40-hour work week — 8 hours a day and 5 days a week. Many foreign employers dislike this system because it means any work done outside standard working hours is overtime and must be paid accordingly. China’s laws recognize this standard system is not practical for certain positions and for certain industries and it allows for two major exceptions, with one being the flexible working hours system. This system is somewhat similar to the salaried employee system in the United States in that it allows employees to work flexible hours without overtime.

China’s flexible hours system sounds good to foreign company employers, but they so often mess it up that it sometimes seems most would be better off were it not to exist at all. To get one or more of your employees in under the flexible working hours system, you must secure prior government approval and this can be a painful and frustrating process, even for those of us who do it all the time. The requirements for getting an employee under the flexible hours system (like pretty much everything else employee related in China) are localized and can change without notice. The local government decision on whether to grant a flexible hours exception rests with local employment officers and they have plenty of discretion and their interpretations of the law can vary. Making things worse, an approval is usually valid for only one year so you need to renew it every year, and the renewal process can be just as arduous as the initial application. Once any of our China employment lawyers gets an approval, we are always certain to send that same lawyer back for any subsequent approvals, figuring that we are not going to mess with what works.

Because of these difficulties, we are starting to see China employers come up with “creative” ways to get around this problem. For example, instead of seeking government approval before they designate the employees to work flexible hours or securing approvals for renewals when the validity periods are expiring, they enter into a “well-written” Chinese-language agreement with the employee that specifically states the employee will work flexible hours and any overtime pay will be dealt with accordingly. Bad idea. The validity of these sorts of agreements has been tested by China’s courts, and the employers have lost nearly every time. In a recent case in Fujian Province, an employer argued that the local law requiring prior government approval for a flexible hours system is not mandatory and because the employer and his employees had agreed to such a system of their own free will, their agreement did not violate any mandatory laws and should be respected. No surprise to anyone who knows China’s employment laws, but the court did not side with the employer and it instead ordered it to pay all overtime, plus penalties.

There are actually a few very limited circumstances under which employers do not need prior government approval before they can make an employee work flexible hours, but those exceptions vary by locale and they can change without notice as well. On top of this, we are aware of situations where the law says government approval is not required for certain positions but the local labor authorities nonetheless still mandate prior approval. Your outcome will ultimately come down to your locale, but our advice to clients is never to institute a flexible hours program without first getting sign off from the relevant authorities. Failing to do so can lead to lawsuits and penalties.

Even if you do everything right in securing relevant government approval, you also must then follow all the requirements of a flexible hours system and these too can be complicated and local. For example, in a case in Tianjin, an employer that obtained government approval to have an employee work under the flexible working hours system lost a lawsuit to an employee who worked 8 hours a day, 6 days a week for years without overtime. The court ruled that even though the employer had secured government approval for the employee to work flexible hours, because the employer made the employee report her attendance and work overtime as though she were still on a standard hours system, the laws on standard working hours must apply and the employer must pay this employee overtime pay for all past overtime work.

When it comes to China employment laws, you really need to get clear on what can be contracted away, and what cannot.

Towards that end, it is with great pride that I announce the recent publication of my book on China’s employment law, entitled, The China Employment Law Guide: What You Need to Know to Protect Your Company. The Kindle edition is already out and the softcover version will soon follow. I wrote this book intending it to be a quick and easy off the shelf reference for companies with employees in China. Please check it out and let me know what you think.

 

 

 

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.

We work with a number of clients who have goods manufactured in China – everything from plastic beach balls to sophisticated home electronics. We provide those clients with a wide range of business and legal advice, and often also end up drafting agreements for them: NNN agreements, development agreements, mold agreements, manufacturing agreements, and more. In the course of assisting these clients, many will ask if we can help them find a factory to manufacture their products.

The answer is no. First, it could end up being a conflict of interest (or at least appearing like one) if we have a relationship with both sides of a transaction. Even if both parties agree with full disclosure, it’s rarely worth the hassle. Second, recommending factories is outside our expertise. Even though we have done deals with hundreds of factories in China, there are exponentially more that we haven’t even heard about. Why would we? We’re lawyers, not sourcing agents.That said, we are always happy to recommend to our clients sourcing agents with whom we have worked and respect.

But China factories? Nope.

China lawyers China attorneys
Better to shut the barn door BEFORE your IP leaves

As China lawyers, one of the worst parts of our job as China lawyers is when a foreign company (usually an American or European or Australian company) contacts us after having essentially lost its IP to a Chinese company. In those situations, we review the relevant contracts and relevant IP (trademark, copyright patent and licensing) registrations to determine whether or not they have a good case against the alleged IP infringer. The overwhelming majority of time they do not and it is no fun essentially telling them that, “sorry, you’ve lost your IP and there is little to nothing we can do because YOU didn’t do what you needed to do beforehand to protect your IP from China, but hey, if you want to prevent this from continuing to happen to you….”

One of the best parts of our job as China attorneys is working with foreign companies to prevent the above sort of situation before it happens. The below email is a fairly typical sort of email we send to existing clients, explaining what they must do beforehand to protect their IP from their Chinese counterpart, which in this case is one of China’s largest and most powerful companies.

If ____________ [big and powerful China company] does “development work” absent a formal written agreement that deals with the development work, it can claim rights to the development work and it also can claim certain patent rights based on the development work on an incremental change, new work basis. China like Germany does not require very much of an incremental change to allow a new patent, especially for design patents and similar “junk patents” popular in China.

The way to deal with this is to enter into an product ownership/product development agreement that directly confronts the issue. In a situation where you are asserting the entire ownership of everything done with respect to your product, such an agreement is not complex. IF the Chinese side’s goal is to infringe on your product, they will be reluctant to sign the agreement. However, IF they sign the agreement, the protection is powerful, but only against the parties that sign. What we would do with _______ is to say: If you release our information to anyone, YOU are liable for the breach, without regard to your own fault. We can normally draft this as a very specific agreement, however, we can also just include this type of provision into any form of global agreement with these companies.

My cautions are as follows:

You should never do a deal with a company you believe intends to infringe; you are not looking for a lawsuit. As you know, recovery from infringement carried out by a huge entity like _______ will be difficult for a company like yours.

__________ is a giant company that basically “owns” _________ [a specific third tier China city]. Thus any legal proceeding against them in ________ would be difficult. This again calls for caution and a program where you receive adequate payment BEFORE it has a chance to infringe.

China employment law guide
Buy this book. NOW.

A truly excellent article on Linkedin by Gordon Orr, entitled, Why Boards Should Worry About China. Guess what? Companies too small to have a board should worry too.

Orr starts his article by noting how many companies “need to be spending more and more time addressing China-related topics. And not just on the business strategy questions, but also on a much broader set of issues.” He then talks about how internal audit teams “spend a disproportionate share of their time on China, checking for compliance both to global and China specific standards.”   Of course, companies doing business in China must comply with “all the standard global compliance challenges – know your customer, modern slavery act, foreign corrupt practices act, and more.” That almost goes without saying. But in China it is “just harder than in many places to ensure that the minimum bar is reached, not just once a year but on a day in, day out basis. The global reputational challenges of being caught in a failure to comply are often larger than the legal ramifications.”

The article points out that getting your employees to sign something saying that they will comply with the company’s code of conduct on such things as kickbacks and conflicts of interest and discrimination and harassment. The company must also engage in sufficient effort to ensure that its China “employees understand what these policies require, that they are being enforced, and appropriate sanctions are applied.” See China Compliance: Don’t Rely on Your China Staff.

Here then is what I see as the money quote from Orr’s article:
As a rule of thumb, I would suggest to any board with material operations in China that if you have not fired someone in the last 12 months for taking kickbacks or committing expense fraud you really have not been looking.
I read this line to a number of the China lawyers in my firm and their common response was “just one?” I know that as lawyers we tend to see the underbelly of companies doing business in China, but I also know that we deal with a steady stream of matters for U.S. and European companies that are losing money in China because one (or usually more) of their employees is stealing from them in China. Recently — and I am not entirely sure why, we are seeing a lot more cases involving someone from the home office in the United States or in Europe (for us that is mostly Spain, Germany or the United Kingdom) on the take from some supplier or some other company in China. And here’s the thing: nine out of ten times it should have been fairly obvious what was going on, but nobody wanted to be the one to raise a stink about it. Nobody wanted to be the accuser.

Orr then talks about China’s “own growing set of laws and policies” that need compliance planning and reviews and audits:

In 2017 new cybersecurity laws have been a central focus. Companies need to understand the scale and nature of the data they create in China and ensure this data is only transferred across borders (even just to back it up) if it falls into categories where this is allowed.

Also, when buying consumer data from third parties, are you sure about how it was acquired and that consumers gave their consent?  More basically, protecting your own corporate data from hacks and from employees walking out the door with it needs extra attention as global IT security tools may not be permitted in China.

Compliance with increasingly burdensome employment and compensation laws is also a major issue.  Getting employee pay and tax benefits correct from city to city is so complex that it is being outsourced by more and more companies. Remitting capital out of China is a process fraught with opportunities for missteps, steps that at times could be omitted but today must all be followed.

Employer-employee problems are a massive growth area for our law firm and within that category, employer audits easily comes in first. Our lead China employment lawyer has so many stories to tell about China’s increasingly complex employment laws she could write a book about it. Which is my not-so-subtle way of setting up a mention that she just did and it went live on Amazon only yesterday. I cannot urge you enough to buy this book (heck, it’s only USD$2.99!) if you have any employees or independent contractors in China, or even if you are just thinking of getting some.

Orr then talks of the compliance problems inherent when you “partner” with a Chinese enterprise and advices being “hesitant to be the first to become a partner to a Chinese enterprise, otherwise the burden of ‘educating’ your partner on the necessity of compliance with policies they may simply believe are irrelevant will all fall on you. This won’t be something you can fix after the deal is struck; ensure that the issue is addressed in upfront negotiations so that at least some basic expectations have been set.” This is some seriously great advice!

Orr then ends his piece with the following three questions salient for any foreign company doing business in or with China today:

  1. Global competition from China. When, how and where will Chinese competitors become, if they are not already, effective global competition? What is our strategy to pre-empt and mitigate?
  2. Preparedness for discontinuity. What would happen if there was a major economic discontinuity in China, arising from global geopolitics, a shock to the domestic financial system, a natural disaster or other? Do we have a play book worked through?
  3. Should we be performing better in China today? Is the shortfall to expectations due to external factors? Or is it our own team?

Does your company have answers?

Every so often there seems to be an uptick in what some call the China domain name scam and now is one of those times. Our China lawyers frequently get emails from U.S. companies asking us what they should do about an email that they just received (usually in badly written English) telling them they must register their domain name in China right away or lose it forever. We have been getting a ton of those lately, but when I get one from a sophisticated international lawyer I feel it is time I write about it again.

China domain name scams are again on the rise.
China domain name scams are again on the rise.

These emails seem to come right after the foreign company just returned from a trip to China, or else it is then when they are most attuned to them and most concerned. I do though believe that there are people in China who get the names of U.S. and European companies that go there and then send out these emails.

Just so you know, these emails usually look something like this and they are complete fakes and should be ignored:

We are China’s internet domain services company and last week, we received an application from a Chinese company that has requested “[NAME OF U.S. COMPANY”] as their internet name and China (CN) domain name. But after checking into it, we learned that this name conflicts with your company name or trademark. In order to deal with this matter better, it’s necessary to send email to you and confirm whether this company is your distributor or business partner in China and to confirm that you authorized this domain registration Please respond soonest.

Or something like this one, which went to my international attorney friend:

This is about the registration of your company name “______________.” Please forward it to your companys leader. Thanks!

Dear Sir or Madam,

I am grateful for you checking this letter out. We are a Chinese domain registrar. Recently, we received the registration request from “__________ Technology Ltd” applying to register __________ brand and domain names(cn hk etc), which have same main body as your company’s name. We send this letter to confirm with your company whether or not you authorize them to register those names. Please give me your thoughts ASAP so as to let us carry on, Thanks.

It’s a scam, and even if it isn’t do you really care?
We first wrote about this scam back in 2009, in China Domain Name Scams. Just Move Along…., with this to say:
If your company has done anything in China (even just sending someone there to meet with a supplier), you have probably received a somewhat official email offering, at a steep price, to “help” you stop someone from taking your domain name.
DO NOT RESPOND.
Near as I can tell, every single one of these that I have seen (and I have seen at least fifty of them because clients are always sending them to me) are a scam.
You also may get emails from someone claiming to have already registered some iteration of your company name (or one of your product names) and seeking to sell it to you. For example, if your company is called “xyz” and you already own the xyz.com domain name, your email may come from someone who has purchased and now wants to sell you the xyz.cn domain.
What to do?
First off, as soon as possible, register whatever domains necessary to protect yourself. Determine now what domain names you care about so you do not need to make this determination with a gun to your head. Right now is the time to think about Chinese character domain names.
Secondly, if someone has taken a domain name that is important to you and they are now offering to sell it to you, you essentially have three choices. One, let the domain name go. Two, buy it from the company that “took” it from you. And, three, pursue legal action against the company that took it from you.
Preemption by registration is your best and least expensive protection.

Nothing has changed since then, near as we can tell, other than that the popularity of these domain name scams waxes and wanes and lately they’ve been on an upswing. Here’s something else you have to ask yourself: do you care that someone is registering your domain name in China? And if you do, do you have a trademark there, which likely would prevent it? And if you care about China, are there other countries where you should be registering your domain name?

Anyway, just be careful out there.

China Due DiligenceLast week the news broke that Dalian Wanda, the powerful Chinese real estate developer and entertainment company, was selling off its half-built movie studio, a massive complex under construction near Qingdao.

It was the latest in a string of bad news days for Wanda, most of which have been precipitated by the Chinese government’s increasingly strict controls on outbound investment. Wanda’s $1B purchase of Dick Clark Productions fell through in March of this year. The chairman/CEO and the head of China operations of Legendary Entertainment, the film production company that Wanda bought in 2016 for $3.5B, both left this year and have yet to be replaced. Legendary’s recent films (with the exception of Kong: Skull Island) have tanked everywhere but China. Wanda quietly withdrew its attempt to fold Legendary into its existing film operations and list the reformulated company on a Chinese stock exchange. Wanda announced an ignominious sale of its theme parks less than a year after announcing Wanda was going to clean Disney’s clock.

And looming over it all, the Chinese government has made it clear – in increasingly public fashion – that Wanda’s ability to borrow money will be highly constrained.

Both Legendary and Wanda’s subsidiary AMC Theaters issued public statements in the past week that they were not dependent on Wanda for funding; the Western markets were not impressed.

No doubt many people in Hollywood are engaging in a bit of schadenfreude right now. Wang Jianlin, the founder and chairman of Wanda, is a bit like the LaVar Ball of Chinese entertainment (albeit with $30 billion more to his name). He was brash, but plenty of people wanted to do a deal with him when he had assets to burn and was talking about taking a stake in every major studio. Now they’re not sure what to think.

I don’t feel any joy at Wanda’s apparent retreat from the movie business, if that is in fact what’s happening. Yes, they’ve had substantial setbacks and remain highly leveraged, but Wanda is still a huge company and a major player in real estate development, which has always been its core business. It controls more movie screens than any other company in the world, and it still has a sizable film production division. Wang is a shrewd businessman and not to be underestimated. You don’t get to be the richest man in China without having a lot on the ball. Everyone thought he had overpaid for AMC Cinemas but the company has more than doubled in value since he bought it.

But Wanda’s proposed studio in Qingdao never made much sense to me. I lived in Qingdao, and it is a wonderful city. But it has scant connection with the Chinese film industry, and little to recommend it as the site of the world’s largest studio. Wanda promised moviemaking on a grand scale, including enormous soundstages, multiple backlots, and a 40% subsidy for anyone making a movie there. But the reality on the ground never seemed to match the rhetoric, and few (if any) filmmakers not associated with Wanda or Legendary have filmed there.

What was the reality on the ground in Qingdao, anyway? My colleague Steve Dickinson (who spent nearly a decade in Qingdao) and I could never figure it out. The studio complex is almost an hour’s drive south of the city proper, with nothing of note in between but for a few factories. When we visited the site a few years ago, you would never have known that a huge film studio was being built. It just seemed like a pure real estate play: swarms of agents descended on anyone who got close, thrusting brochures for as-yet unbuilt apartment towers. Tour buses stopped by regularly and disgorged passengers who had no knowledge of, or interest in, the studio. And this was well after the glitzy announcement with Nicole Kidman, Leonardo DiCaprio, and John Travolta in Qingdao.

The Qingdao studio complex is now being sold to Sunac, another Chinese developer. Will the studio be completed by Sunac? Was it ever going to be completed? Who knows? Wanda certainly had the money to build it, and Wang loves movies. The ultrawealthy have a long history of bankrolling films, from Howard Hughes up to Megan Ellison. Perhaps this is just a strategic retrenchment. Wanda’s strategy with the Qingdao studio complex wasn’t much different from that of many Hollywood players: if you can’t sell the steak, sell the sizzle.

The recent headlines characterize Wanda’s troubles as if they were the result of poor business judgment. I don’t think that’s fair. This story isn’t about Wanda. It’s really a story about China’s reluctance to let foreign entertainment companies compete in a free market. Just look at what’s happening in Chinese movie theaters right now. A foreign movie blackout is in place, and the screens are being inundated with The Founding of an Army, directed by Hong Kong legend Andrew Lau (Infernal Affairs, which Martin Scorsese remade as The Departed) and starring a cavalcade of Chinese stars both young and old. If history is any guide, The Founding of an Army is guaranteed to do big business at the China box office, regardless of how many people actually see it. For the previous two movies in this series (The Founding of a Nation and The Founding of a Party), state-owned enterprises bought vast blocks of tickets for their employees.

One takeaway from all of this is that foreign entertainment companies (and even just foreign companies in general) need to be more careful than ever when dealing with Chinese counterparties. If the Chinese government interferes directly there’s little you can do, but up to that point you can do a lot to protect yourself. Just look at all the lawsuits being filed in Los Angeles against Chinese production companies – lawsuits which may be doomed to failure, because even if the plaintiff wins, the judgment won’t be enforceable in China.

Conduct due diligence. Make sure your contracts are written in Chinese and enforceable under Chinese law. Get an upfront payment so you can be sure the Chinese side can actually pay under the contract. And if something sounds too good to be true (like the 40% subsidy for filming in Qingdao), it probably is.

China scamsFor decades, Western companies have been making massive financial mistakes in their efforts to do business in China or with China. But as Chinese companies and Chinese individuals go outward from China, we see them making the same mistakes in much much greater numbers, at least percentage-wise. Chinese companies far too often eschew using attorneys or other qualified advisors and they are paying the price for this.

Just a few examples:

  1. Chinese company came to my law firm looking for legal representation to buy a $10 million commercial building. We quoted them a fee to conduct due diligence on the building and they found it too high and went forward with the deal with no due diligence. Turns out the property they bought was in need of a massive environmental clean-up and this Chinese company ended up having to pay around $5 million to accomplish this. Whenever I tell this story I say that any first year associate would have quickly discovered the environmental problem, guaranteed.
  2. Chinese company bought a retail property sight unseen in Spain and then discovered it had grossly overpaid for it because its access was terrible. Again, anyone who had looked at the property maps would have seen this, but this Chinese company chose not to pay anyone to do so, because it would “cost too much.”
  3. An American company in the middle of a bet the company lawsuit sold itself to a Chinese company as though no lawsuit were pending. The Chinese company did this deal with no lawyer (using the seller’s lawyer to document the entire transaction) and it ended up losing the lawsuit (which lawsuit the Chinese company didn’t learn about until after the deal closed) and had to shut down because of it. The seller — not a client and not someone with whom I will ever do business — told me that doing this deal “was like taking candy from a baby” and he has since become “a consultant to ‘troubled’ American companies that want to sell themselves to Chinese companies.” His pitch is based on how easy it is to find Chinese companies that won’t dig deep enough to see all of your company’s warts and so if you are a failing US business you can make a lot more selling to a Chinese company than to an American one becuase the Chinese company will probably never know about your problems. I assume this guy then works with lawyers who draft contracts that absolve the selling company of subsequent problems and the Chinese buyers do not realize what they are signing. Good lawyers do not allow their clients to sign such documents.
  4. Investment fraud. Fake United States or British “investment banks” that take in money from Chinese investors and then completely rip them off. This is a big one and it is growing. Fast. I get emails on these all the time, from both Chinese who have lost a ton of money with these fake investment banks and from readers and friends (most of whom live in China) who have been asking us to write about these scams. The following is the latest such email:
__________ Capital is the outfit supposedly from Washington DC.
This is a supposedly American company selling fake Credit/Debt Obligation swaps and REITs for fake USA properties to gullible Chinese. The numbers are staggering. Seriously staggering. Like Billion of dollars. Someone in my office got bilked BIG time.
After some research, I found out it’s a sloppy but effective MLM Ponzi scheme. The operators are Australian, Chinese, Taiwanese. The offices they list on their website are all empty around the world.
The people are so blatant, that as soon as it is clearly obvious to the suckers that they’ve been had, the operators start a new one with more promises of big riches and a complicated website with lots of BS, and China being so big, they attract a whole new set of suckers.
Ever hear of anything like this ? I mean besides Wall St, lol. Any idea if there are any watchdog agencies that can or would do anything about it ? This poor person in my office lost her entire life savings.
It really makes clear why China has resisted Western Financial services. Just because they are greedy and stupid doesn’t mean they should be robbed. I mean seriously….
I checked out the website/company to which this person refers and I am 99.99% certain it is a scam, but still do not want to list it here for fear of getting sued for doing so. The website reeks of stability, bragging about its many years in business, the sophistication of its investments and the huge amount of money it has under management. The photos are of nice looking distinguished white people sitting around nice offices. It mentions a few people in the leadership (all with the ultimate in waspy sounding names) and the prestigious colleges and universities they attended, along with the well-known companies for which they previously worked. But no years are mentioned and every search I did of this company and of its “leaders” only left me more convinced that it is a scam.
I guess the point of this post is that if you are going to spend or invest your money internationally, you must recognize the risks and do and SPEND what you can to mitigate them and if you are not going to do that, you really should stay at home. Just as we are always preaching to Westerners that due diligence when doing business with China is not optional, we are preaching to the Chinese that when doing business in the West, due diligence is also mandatory.
Would love to hear what you are hearing out there about Chinese companies and individuals getting cheated in the West. What are you seeing out there?