How to negotiate with Chinese companiesIn this series of posts I am looking at themes explored by Lucian Pye in his work Chinese Commercial Negotiating Style. Pye concludes that the way most Sino-Foreign negotiations are conducted helps the Chinese side apply its preferred strategies and tactics. My first post looked at how Chinese companies tend to control the preliminaries during what I have called the “courtship” phase. The second post considered what Pye has to say about the Chinese tendency to prefer agreements on generalities. In this third post I examine what he has to say about specific Chinese negotiating tactics.

According to Pye, Chinese negotiators tend to use the following tactics:

Open with flattery — In response to flattering remarks the foreigner feels compelled to give an enthusiastic affirmation. The foreigner is then called on to give an emphatic denial of a feigned, self-deprecating remark. This puts the foreigner on the back foot from the outset.

Operate on two levels — There is the manifest level of bargaining about the concrete and there is also the latent level at which attempts are made to strike emotional bargains based on dependency. Chinese negotiators seek relations in which the foreigner will feel solicitous toward China, thus implicitly becoming a protector and more a superior than an equal.

Focus on mutual interests — Westerners like to think of themselves as conciliators. The Chinese tend to reject the principle of compromise and prefer instead to stress mutual interests. When mutual interests have been established it is easier to ask the foreign party to bear a heavier burden without protest.

Use meetings as seminars — Negotiations are seen partly as information-gathering operations. Foreign competitors are played off against against one another to extract maximum technical intelligence from presentations. Negotiating sessions are used frequently for training purposes. The foreigner is encouraged to perform so as to impress the passive Chinese host. The obliging guest entertains in repayment for hospitality and brings “gifts of knowledge”. Put simply, Chinese companies often claim to want to do a deal with you when all they really want is to get access to your technology or know-how. I cannot stress enough how often our China lawyers see this sort of situation.

Blur the lines of authority — You can’t tell who reports to whom or where the apparent leader fits in the hierarchy of the Chinese company. Negotiating teams tend to be large but the lines of authority are diffuse and vague. Chinese negotiators are often unsure of their mandates and of the probable decisions of their superiors. They therefore tend to give inaccurate signals about the state of negotiations. Foreigners persist in trying to find a particular person who has command authority at each level. In China it cannot be assumed that power is tied to responsibility. Proof of a person’s importance often lies precisely in their being shielded from accountability.

Never say “no” — Chinese negotiators will frequently seem to be agreeing when they say something is “possible” but often this is an ambiguous way of saying “no”. They will often respond with silence to a proposal and then at a much later date suddenly return with interest.

Never telegraph their next move — Chinese negotiators don’t telegraph their next moves through displays of emotion. The level of friendliness or impersonality remains the same whether negotiations are heading for success or failure. This brings surprises. Warm and progressively friendly meetings can lead to disappointing outcomes. Chinese negotiators are quite prepared to end meetings or negotiations on a negative note. As negotiators often have little authority they often find it prudent to maintain a negative attitude. At the same time, apparently disinterested negotiators can suddenly announce that a positive agreement is possible.

Exploit Chinese members of the foreign team — Ethnic Chinese associated with the foreign team will be sought out in the belief that they are naturally sympathetic to China. Our China attorneys have also seen many instances where an Ethnic Chinese person on the foreign side is accused of disloyalty for not siding with the Chinese side in the negotiations — always in Chinese, of course.

Use “shaming” — Chinese negotiators may be quick to point out “mistakes” in an effort to put the foreign party on the defensive. There is a deep belief that people will be shattered by the shame of their faults so there is a tendency to make an issue over trivial slip-ups and misstatements.

Make big asks — Chinese negotiators often have no hesitation in presenting what they must understand are unacceptable demands. These demands are often accompanied by a hint that they will be withdrawn in return for only modest or symbolic concessions. Extreme language is often used to obtain symbolic victories.

Stall — Chinese negotiators are masters of creative use of fatigue. They have, according to Pye, great staying power and almost no capacity for boredom. These traits keep foreigners’ hopes alive. This approach may also reflect lack of experience, bureaucratic problems or a subordinate’s fear of criticism from above. Conversely, when agreement reached it is often the Chinese who become impatient for deliveries by the foreigners. For more on this tactic, see Doing Business In China Requires Patience. Don’t Just Be Leaving On That China Jet Plane.

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

In my final post in this series I will outline Pye’s tips for foreigners when negotiating with Chinese companies.

China IP webinar for China lawyersOn October 18, I will be putting on a webinar, Doing Business in China: Structuring Your Deal and Protecting Intellectual Property. This webinar is aimed mostly at lawyers and it is eligible for CLE credits.

It is being put on by Commercial Law Advisors and they describe it as follows:

Who Should Attend? Corporate counsel, in-house counsel, attorneys advising companies or organizations, intellectual property attorneys.

Companies often cannot afford not to do business in China. Whether producing goods there or selling to the Chinese market, companies that engage in business with Chinese partners need up-to-date legal advice on how to protect their technology and other intellectual property (IP) interests from being counterfeited, pirated, or otherwise misappropriated. As IP theft is one of the top issues facing businesses operating in China, there are substantial risks companies must identify and address proactively to protect their valuable IP assets. Deals made in China can threaten IP rights not just in China, but in markets around the world. Understanding the Chinese IP landscape and how to manage the pertinent issues can go a long way to safeguarding your client’s valuable IP interests.

Please join Dan Harris as he explores the nuts and bolts of constructing a good business deal with a Chinese partner, what your agreements should include, and how to manage the Chinese IP rights framework to minimize your client’s IP-related risks.

This webinar will cover:

How to choose a good Chinese partner
Identifying the IP assets that need protection
How to structure your deal
Drafting your deal papers
Drafting China employee contracts to protect your IP
IP registrations: What you should know about trademarks, patents, copyrights, and licensing agreements

China Law Blog readers who use promo code cw16dbc will receive $35 off. Go here to register.

I hope to “see” you there.


Softwood lumber disputeI recently spoke on the U.S. Canada softwood lumber dispute at an American Chamber of Commerce in Canada event. I was subbing for my colleague Bill Perry who could not make it because he was in China. My talk focused on the history of the dispute, its key issues, and most importantly, what will likely happen if new AD/CVD petitions are filed and investigations initiated. This post builds off my presentation and it focuses on how China will affect the next round of the US-Canada Lumber wars, expected to start this week.

For the past ten years, the United States and Canada have abided by a 2006 agreement that regulated Canadian lumber imports into the United States with a system of export fees and quotas triggered by specified average US market price points. That 2006 Softwood Lumber Agreement is set to expire this week and with that expiration, a coalition of U.S. lumber producers is expected to immediately file a fifth round of antidumping (AD) and countervailing duty (CVD) petitions seeking US government investigations to determine whether Canadian lumber is unfairly dumped or subsidized and is injuring the U.S. domestic lumber industry.

Many of the issues in this fifth round of the US-Canada Lumber trade war likely will be the same or very similar to issues raised in the previous four rounds. US lumber producers will likely allege that Canadian lumber producers benefit from a wide array of government grants, loan guarantees, tax preference schemes and other subsidies provided by the Canadian federal and provincial governments. The US lumber producers will contend that these subsidies give Canadian lumber an unfair competitive edge.

The primary issue remains whether Canadian lumber is unfairly subsidized by the Canadian system of “stumpage rates,” which is the price paid for the right to harvest lumber from provincial land. Since most Canadian forests are on “crown” land controlled by the Canadian provinces, Canadian stumpage rates are primarily set by each province. Since most US lumber is harvested from privately owned land, US stumpage rates are primarily market determined through competitive auctions. US lumbers producers are unhappy with the benefits Canadian lumber producers allegedly receive from the provincial stumpage system.

This next round of lumber dispute will likely be more than just a simple replay of previous lumber investigations since there have been a significant developments since the last round was settled in 2006. Two China-related developments in particular could have significant impact.

First, China has been the most targeted country for US CVD investigations; the US Department of Commerce (“DOC”) has conducted about forty CVD investigations against China since 2008. In many of these CVD cases against China, the DOC calculated very high subsidy margins, often based on aggressive interpretations of CVD laws and regulations. The CVD investigation practices developed by the DOC in these Chinese cases will likely be applied in the next Canadian lumber CVD investigation. The DOC will no doubt conduct its CVD investigation against Canadian lumber mindful of how it might affect on-going and future Chinese CVD cases. Unlike past Canadian lumber CVD determinations where CVD margins never exceeded 20%, the DOC could very well calculate a much higher than expected CVD rate in Lumber V.

The other significant post-2006 China-related change is the growth Canadian lumber exports to China. In 2006, 82% of Canadian softwood lumber exports went to the United States. By 2011, the United States received only 53% of Canadian softwood lumber exports. China in particular became a significant market for Canadian lumber, much of which was from British Columbia.

In addition to developing alternative export markets (like China), a number of Canadian lumber producers have developed alternative production options by acquiring US lumber mills. As of 2015, major Canadian lumber producers (such as West Fraser, Canfor, and Interfor) now own more sawmills in the United States than in Canada, and they are now also among the top ten largest U.S. lumber producers.

Canadian lumber producers that now have the option to ship their lumber within the US from their US sawmills and to export their Canadian lumber to China are going to be well-positioned to withstand settlement terms demanded of them by the US lumber industry. At a minimum, the new cadre of Canadian lumber producers with China and/or internal US options will almost certainly make it harder for Canadian lumber producers to unify around a common negotiating position against their US counterparts.

China’s influence on even Canada-US timber relations will no doubt be felt.



China lawyers SinosureOur China lawyers have been getting a spat of inquiries in the last few months from foreign (mostly American) companies that have lost knock-down drag out disputes with their Chinese manufacturers. The American companies have been getting their clocks cleaned in these disputes to the point that many are having to shut down their businesses.

My goal with this post is to lay out the basics for surviving (when possible) such disputes. First though a bit of background.

SinosureNearly all Chinese manufacturing companies that provide credit to foreign businesses do so because their invoices are insured by Sinosure. Sinosure (a/k/a The China Export and Credit Insurance Corporation) is a massive China State Owned Entity (SOE) that provides Chinese companies with insurance coverage against political commercial and credit risks. Importantly, Sinosure also provides export financing via an agreement it has with J.P. Morgan. Sinosure also covers China SMEs with export volumes of less than two million dollars a year that are unable to bear the political and commercial risks of international trade.

Foreign companies typically never deal with Sinosure until they have a payment dispute with their Chinese product supplier. When that happens, Sinosure usually steps in and threatens to sue the foreign company that owes the money. Sinosure does this by hiring debt collection lawyers in the debtor’s country to pursue the debts of the Chinese manufacturers it insures. Sinosure is very aggressive in pursuing collection cases against American companies, most of whom have little clue about what they are up against.

The Typical Sinosure Case. I cannot promise the below is truly the typical sinosure case, but it is the typical case our China lawyers are hearing about and, most importantly, it is the typical case that has proven so deadly to foreign companies. The below is a composite, written to scare American and European companies straight.

  1. U.S. company buys $2 million of widgets from Chinese manufacturer for export to the United States.
  2. U.S company pays Chinese company $1.4 million upfront for the widgets, with the remaining $700,000 to be paid upon approved delivery.
  3. The widgets that arrive in the United States are of poor quality.
  4. The U.S. company refuses to pay the remaining $700,000.
  5. The American company sells the bad widgets at fire-sale prices, netting 500,000 or $200,000 less than the $700,000 it is already out of pocket to the Chinese company.
  6. The Chinese manufacturer threatens the U.S. company with a lawsuit and the U.S. company threatens the Chinese company with its own lawsuit or with counter-claims for “the bad product and for the damage caused to our reputation. “
  7. The U.S. company then does nothing for months, figuring there is no way the Chinese company will have the gall to sue and also figuring that suing the Chinese company would be more trouble than it is worth.
  8. Then all of a sudden, a U.S. lawyer contacts the U.S. company and says that unless the U.S. company immediately pays the remaining $700,000 owed to its by now former China manufacturer, it will soon be sued in the United States. Nine times out of ten, this lawyer has been retained by Sinosure.
  9. The U.S. company almost always starts out defiant, telling the lawyer that it will never pay anything because it doesn’t owe anything and if the Chinese company were to sue in the United States, it will counterclaim.
  10. The U.S. company then usually comes to realize that it can no longer get any credit from any manufacturer in China. This is because Sinosure has put the U.S. company on a list of companies to whom China exports will not be insured. Once a company makes this list, it is almost unheard of for a Chinese company to extend that company any credit.
  11. The U.S. company’s inability to buy from China on credit is usually very tough on them. Remember that this company is already reeling from having lost money on the bad product it received.
  12. The U.S. company then calls its former manufacturer to try to work out a “win-win” settlement.
  13. The U.S. company and the Chinese company work out a deal whereby the US company will 1) pay the Chinese company half of the $700,000 it purportedly owes it and start buying from the Chinese company again. 2) The Chinese company will take less than the $700,000 owed to it because it “wants to do business with the U.S. company again.” 3) In return for the $350,000 payment from the U.S. company, the Chinese company will forgive the full debt and, most importantly, it will let Sinosure know that all has been resolved.

Real Life. Unfortunately, as far as I know the above is never ever ever the way it really goes down. Here is what happens in real life:

  1. The U.S. company pays the Chinese company the $350,000 believing that its emails are sufficient to prove the deal.
  2. The Chinese company is delighted to have received the $350,000, especially since this is in addition to the full compensation it already received from Sinosure.
  3. The Chinese company does not tell Sinosure that it received the $350,000 because if it did so, it would need to send that money to Sinosure. Not to mention that it probably has no authority from Sinosure to do such a deal in the first place.
  4. The Chinese company is not going to start selling its products to the U.S. company again. Why would it when it cannot get export insurance were it to do so?
  5. At this point the U.S. company is in a terrible position. It is in the hole $200,000 from paying for the bad widgets and it is now in the hole an additional $350,000 for making another payment for the bad widgets. To top this all off, it has an aggressive American law firm (that without any exceptions on those cases in which my law firm has been brought in) has zero clue about anything China. Zero. Nada. Zilch. Rien. Nichts. 没有.
  6. Unable to afford to hire U.S. litigators to fight the lawsuit that has just been or will soon be filed against them and to hire China lawyers to sort through and explain to a Chinese SOE what has transpired, the U.S. company tosses in the towel.

How to Do It Right. And here’s the thing. The above can all be easily prevented so long as you do not “settle” with your Chinese manufacturer or with Sinosure without making 100% certain that your doing so will actually resolve ALL claims against you. Do not pay anyone anything without first getting a proper written agreement (in Chinese) that makes clear that you have resolved all of the claims against you by both your manufacturer and Sinosure. This agreement needs to work in both China and the United States and it must be signed by all parties (including your Chinese manufacturers) or you could face very troubling additional lawsuits down the road.

And this is only if you are insistent on settling. Most of the time there are various ways to get Sinosure to give up and for you to start getting credit from Chinese manufacturers again.

China SaaSCountless foreign software companies wish to deliver their software as a service (SaaS) to China. But since China requires commercial ICP licenses for commercial Internet services within China and generally forbids foreign enterprises from obtaining such licenses, directly providing SaaS through a server in China is typically not possible for foreign software companies.

So what can be done? How can a foreign software company get its software to China’s consumers via SaaS? Two methods for providing foreign SaaS in China have been developed. These methods depend on whether the server will be located outside of China or within China. If the server is located outside of China, we use the reseller model. If the server is located within China, we use the license model.

Many foreign software companies waste a lot of time and money in searching for or trying to develop a third model. Many Chinese companies — out of either ignorance or greed — encourage such searching and trying.

In the reseller model, the foreign SaaS provider brings on one or more resellers in China. At a minimum, the reseller locates customers for the foreign company’s SaaS product. The reseller provides the ultimate customer with a user name and password that allows the customer to connect to the foreign server hosting the SaaS product. The reseller collects the fee from the customer and deducts and pays applicable Chinese business and income taxes and then remits the remaining amount to the foreign software provider.

Though very common, this SaaS reseller system does not strictly comply with Chinese law, since the Chinese Government has never reviewed or approved the software content. However, to date, the Chinese government has permitted the reseller model to be used. This reseller model is permitted because it includes the following safeguards that protect the interests of the Chinese government:

  • Access to the offshore server can easily be blocked by using China’s Great Firewall. If the SaaS content is not acceptable to the PRC government or if the SaaS is used for an unacceptable purpose, the connection to the offshore  server can and will be blocked with no prior notice. This happens regularly in China, often to SaaS/cloud products that seem innocent on the surface. The risk of being blocked is therefore the most significant risk in using the reseller model. Some SaaS is at much higher/lower risk of being blocked than others and part of our role as China lawyers is to help our clients analyze this risk.
  • The reseller is liable under Chinese law for the content of the SaaS product. The reseller is not treated as a neutral, ISP type entity; the reseller is treated as though it is the developer of the SaaS product. This is true even where completely independent third parties are the source of content on the SaaS platform. More important, the reseller is liable for quality as well as content. Consider the potential liability here: some SaaS platforms are used for off site medical diagnosis. What happens if the diagnosis is wrong and the patient is injured or dies? The reseller is potentially liable.
  • All applicable taxes are withheld and paid. Through the reseller approach, the PRC government is able to impose double taxation. Taxation first on the income of the reseller and then taxation on the income remitted to the foreign software company. This access to tax revenue results in a more accommodating regulatory response from the Chinese government, but also in lower income for the foreign software provider.

There are several reasons foreign SaaS providers decide they must locate their server in China. Many do so for the generally faster service speed and connection reliability. Others do so to lower their risk of having their software blocked. Some simply cannot find reliable resellers willing to take on the substantial work and risk. Foreign software companies that use a Chinese server do so via a licensee model.

Under the licensee model, the foreign software company does not directly offer its SaaS product in China nor does it directly control the China server. It instead licenses its software platform to a Chinese entity. that obtains the commercial ICP license that allows for offering the SaaS service to Chinese customers through a Chinese server.

The minimum terms of this sort of SaaS Licensing Agreement are as follows:

  • The Chinese licensee owns the ICP license. Acquiring a commercial ICP license is expensive, and the licensee must pay all the costs. Because of the considerable expense, it is difficult to find Chinese companies willing to take on the financial burden of acting as a licensee.
  • The licensee owns the URL that provides access to the server.
  • The licensee holds a license for the entire content of the SaaS platform software. As with resellers, the licensee is liable for the content and performance of the software.
  • If the SaaS platform is hosted on a cloud server, the licensee has the the contractual relationship with the cloud service provider.
  • The licensee has direct contact with and collects the income from the customers The licensee pays a license fee to the foreign software provider under normal license royalty rules.
  • Since the server is located within China, the Chinese government has the right to access the content of the server at any time.

As the above discussion makes clear, neither the reseller model nor the licensee model are ideal solutions for companies wanting to provide SaaS to China. Most of our foreign SaaS developer clients have used the reseller model successfully. However, the licensee model has been the only solution for some of our clients. For example, for SaaS software that will be used by a Chinese government institution such as a hospital or university research center, Chinese government regulation normally requires the SaaS software be housed on a server located in China. The same rules typically apply for SaaS software used by PRC banks and other financial institutions. Since these situations require a server located in China, the licensee model is the only choice available.

Bottom Line: If you are a software company looking to sell your SaaS software in China, you can do so using either the reseller or licensee model.


China trademark registrationClients often ask us whether they need to register their company name as a trademark in China. As I am the product of an American law school, it’s hard to resist the gravitational pull of responding with “it depends,” but in this instance I have little difficulty. English-language company names have virtually no protection in China. If you don’t want someone else to use your company name in China, you should register it as a trademark.

It’s true that in order to form a business entity in China (e.g., a joint venture, WFOE, or representative office), you must select both a Chinese name and an English name for the entity. But only the Chinese name has any legal relevance. That name needs to be approved by the State Administration of Industry and Commerce (SAIC) and cannot conflict with preexisting company names. The English name, on the other hand, is just a trade name that appears on your company chop. It does not need to be approved, and you can change it at will. It has the same amount of protection of any trade name used without registration: virtually none.

Even your Chinese-language name won’t have any protection as a trademark. Although company formations and trademark registrations are both under the umbrella of the State Administration of Industry and Commerce (SAIC), the departments do not have any meaningful cooperation. A third party could register your entity’s Chinese name as a trademark, and you could register a third party’s trademark as your company name. But because a company’s legal name in China often has little in common with the company’s trade name, most people only care about the latter.

If you haven’t formed a business entity in China, then you have no presence other than the names you use on your products or services. For some companies, like Coca-Cola and McDonald’s, the company name is the brand, and they very much want to protect that name. For other companies, like National Amusements (the parent company of Viacom and CBS) and Yum! Brands (the parent company of KFC, Taco Bell, and Pizza Hut), the company name is not the brand, and they are perhaps not as concerned about protecting it. You’ll have to make that call for yourself.

China has a well-publicized exception that affords protection to “well-known” trademarks even if they’re not registered in China. But as we have written numerous times, this exception is almost never available: unless your company is named Coca-Cola or Nike, you are not well-known. Companies often push back against this and argue that they are well-known in their country among people who know their industry, and that makes their company name well-known. But this is not the standard. For a mark to be considered well-known in China, the mark must be generally known throughout China. Take a big American toy company like Hasbro or Mattel. Most Americans have heard of those companies, even if they don’t follow the toy and game business. But if we stopped 100 people walking down the street in Nanjing, how many do you think would be able to correctly identify either company?

The only protection for your English-language company name in China comes from registering it as a trademark with the Chinese Trademark Office. Relying on any other method is just magical thinking.

China employment lawyersEarlier this year, in China’s Two Children Policy: What China Employers Should Know, I wrote how Beijing was in the process of amending its population and family regulations in response to the amended National Law on the same topic. For how China’s employment laws are both national and local, check out China Employment Law: Local and Not So Simple. Beijing has come out with its amendments and this post discusses their most salient points for Beijing employers.

Under its amended regulations, Beijing now requires a minimum of 128 days maternity leave (this is 30 days longer than the statutory minimum before the amendment). The special leave for a spouse whose wife gives birth is now 15 days (8 days longer than before). This is the same as in Guangdong Province but 5 days longer than in Shanghai. The new regulations delete the special leave provision for late childbirth.

Beijing’s new maternity and family leave regulations also provide that upon the female worker’s request and the employer’s consent, the maternity leave can be extended for another one to three months. This makes it possible for a female employee in Beijing to get up to 7.25months of paid leave for childbirth, regardless of whether it is her first or second child. Under a strict interpretation of the Beijing maternity leave amendments, however, if the employer does not give its consent, the female worker cannot unilaterally make her leave longer than 128 days, or about 4.25 months.

However, as is typical of so many China employment laws and regulations, the rules on extending maternity leave are less than clear. In particular, it is not clear whether Beijing employers are free to say “no” to all employees seeking to extend their maternity leave or whether they must grant maternity leave extensions to employees with “good reasons” for not being able to return to work after the standard 128-day maternity leave. Given Beijing’s longstanding pro-employee approach our China employment lawyers are instructing our Beijing clients to have us review all the relevant facts relating to the employee’s request for extended maternity leave and, most importantly, check with the local labor authorities before saying no. And do not forget that just like everywhere else in China, Beijing employers are generally prohibited from terminating an employee during his or her paternity/maternity or to reduce that employee’s wages in any way.


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

Our China attorneys are often asked some version of the following question:

Why are you so concerned about getting the name of the Chinese party on my contract exactly right?

Answer: Because if it is wrong, the Chinese company may at some point argue (perhaps even successfully) that it is not bound by the contract.

We get this question especially often when our clients are dealing with China’s biggest companies like Baidu, Alibaba or on the other side. Our clients will ask us to draft a contract with Baidu, for example, but Baidu is really more of a brand name than a company. We then have to push our client to get from their Chinese counterparty (at whatever company it is with which they are actually dealing) the Chinese characters for the specific Baidu entity with which they will be contracting.

China employment lawsThe PRC Ministry of Human Resources and Social Security recently released a set of rules regarding providing public notice of China employer labor violations (《重大劳动保障违法行为社会公布办法》). The goal of these new rules is obvious: it is intended to deter employers from violating China’s labor and employment laws and regulations. These rules are set to take effect on January 1, 2017 and will apply to all China employers, domestic and foreign. The following rulings/decisions on employer violations of China’s labor laws may become public:

  • Failing to pay “substantial” employee remuneration
  • Failing to pay an employee’s social insurance and the circumstances are “serious”
  • Violating the laws on working time or rest or vacation and the circumstances are “serious”
  • Violating the special rules on protecting female workers and underage workers and the circumstances are “serious”
  • Violating the child labor laws
  • Causing significantly bad social consequences due to violations of labor laws
  • Other serious illegal conduct

Neither “substantial” or “serious” are anywhere defined.

When publishing these labor law decisions, the following information will be released to the public (with exceptions for national security, trade secrets or individual privacy):

  • The employer’s full name, integrated social credit code/registration number, and address
  • The name of the legal representative or the person-in-charge
  • The main facts of the violation
  • The decision made by the authorities

The above information will be published on the labor authorities’ portal as well as in major newspapers, magazines and TV and other media each quarter at the city/county level and twice a year at the provincial and national level. This information will go into the employer’s credit file on integrity and legal compliance and may be shared with other governmental departments. The employer can file a petition with the relevant labor authorities if it does not agree with what has been published and the authorities will render a decision within 15 working days and notify the employer. If the published information has been modified or withdrawn according to law, the relevant authorities will modify the published content within 10 working days.

The rules are not very detailed, which comes as no surprise. China’s local human resources and social security bureaus will be responsible for implementing these rules and they presumably will have considerable discretion in how they do so. Note though that they don’t get to “cherry pick” what to publish: if a violation meets the applicable standard, it will be published.

Beginning January 1, 2017, if a China employer commits a serious violation of Chinese labor and employment laws, it may be made public by the labor authorities. Make sure you are in compliance and you stay in compliance. And if you do not know whether you are in compliance, figure it out. NOW.

To say we are concerned for our clients for whom we do not conduct regular employer/employee audits is an understatement. It is getting progressively more difficult for foreign companies doing business in China to compete with domestic companies on hiring Chinese workers and a foreign company that gets public excoriated for employer misconduct will no doubt find it even more difficult and expensive to find good workers. We see far too many foreign companies doing business in China with little to no clue about its employment laws. Some still believe China today is the same as China a decade ago, where unhappy employees could be “bought off” with a month or two of wages because they knew they could (and they did) easily move on to another job.

Those days are over and we fear foreign employers will be disproportionately singled out for public approbation.

As we have been pointing out pretty much since we started this blog, going after foreign companies in China is simply good politics. It always has been and it always will be. Read Machiavelli.  Read Sun Tzu.  Read Animal Farm.  Read 1984. Just look at what pretty much every country in the world does.

And going after foreigners virtually always picks up during economic slowdowns, for generally political reasons. Just look at the U.S. election.

Many years ago, in a Wall Street Journal entitled, “China’s Slowdown and You,” Dan Harris, one of the China lawyers at my firm, asserted, among other things, the following on doing business in China during a slowdown:

  • The Chinese government “is much more concerned with social harmony than with economic numbers” and that is why it is continuing to encourage wage growth even though higher wages make China’s factories less competitive.
  • China’s prioritization of its citizens’ contentment means China is going to get tougher on foreigners, just as it (and nearly every other country) has always done when times are tough. Everything foreign businesses do will be under heightened scrutiny.
  • The key to weathering China’s slowdown will be for foreign companies to go back to basics: think afresh about what your company contributes to China’s economy and how that is likely to shape policy makers’ opinions; focus on scrupulous regulatory compliance; and renew focus on due diligence at a company-to-company level.

Way back in 2006, in a post entitled, URGENT ALERT: Register Your Company In China NOW, we issued our first “urgent alert,” noting a crackdown on unregistered companies doing business in China and stressing how foreign companies are never going to be treated like domestic companies:

Long ago, when I was a young lawyer, I wrote an article entitled, “Four Essential Principles of Emerging Market Success,” positing that a failure to abide by the law in the country in which you do business is the surest way to lose your business without any basis for complaint:

In many emerging market countries, local businesses take advantage of corruption to avoid complying with laws. This may work for the locals, but it won’t work for you. The easiest way for a local rival to drive you out is for you to do something illegal. Neither you nor your government will have good grounds to complain if your rival gets your business closed down due to your illegal activity. It might even be your own partner who reports you so he can assume full ownership and control of your business.

The strength of my views on this has only increased as my firm has been contacted far too many times by companies driven out of countries for having engaged in illegal conduct no different from thousands of other foreign companies in the same country.  These companies assume they have legal redress, but in reality they almost never do. So long as the law of the country in which the company was operating allows for closures and/or penalties (and in every such situation my firm has encountered, it has), the company is essentially out of luck.

There was a time where most foreign business was illegal in China, particularly as a Wholly Foreign Owned Enterprise (WFOE).  Those days are pretty much over now and the Chinese government knows it.  If you came into China as a representative office (rep office) back when that was the only way, and your “registered office” is engaged in business activities that are improper for such an office, the time is now to get that right also.

If your local people in China are telling you this is not how Chinese business is conducted, you need to remind them you are not Chinese and the government will treat you differently.  Also remember that your employee’s knowledge that you operating illegally in China gives them tremendous leverage.

Then in 2007, we wrote of this same disparate treatment issue back in the context of China’s environmental laws, in a post entitled, “China Warns Foreign Companies On Pollution“:

China has always and will always (at least for the foreseeable future) enforce its laws more strictly against foreign companies than against domestic companies. I am constantly writing about this not to complain about it, but simply to point out the reality. Just because your Chinese domestic competitors are getting away with something does not in any way mean you will be allowed to do so.

Beijing is also now at the stage where it is pretty much neutral about all but the largest foreign companies remaining in China. I am not saying it is neutral about foreign direct investment (FDI) in general, but I am saying that it really could not care less about whether your individual business stays in China or goes. And if your business is a polluter, it actually would probably rather see you leave.

Lastly, going after foreign companies is politically popular.

We ended that post with the following:

Bottom Line: Obey the law, particularly the environmental laws. It is good business.

Certainly the same is now true with respect to China’s employment laws.

Similarly, in China Fines Unilever For Mentioning Price Increase. What That Means For YOU, we noted how foreign companies doing business in China cannot expect to be treated like Chinese domestic companies:

As long time readers of this blog know, one of our consistent themes has always been that foreign companies in China should not expect to be treated the same as Chinese domestic companies, no matter what the laws may say. The reality (not just in China) is that it is usually good politics to go after foreign companies and it is usually bad politics to go after domestic companies. The reality also is that when a large number of citizens have a particular problem, it is very good politics for the government to show that it is trying to solve it.

Don’t end up on social media for violating Chinese labor laws: the costs will be high. For more on how to handle the employer-employee relationship in China, check out the following:

Just get it right!

China corporate litigation
China company litigation: think tough shot, not slam dunk.

Our China lawyers have been getting an influx of cases from investors and their lawyers wanting our help in suing Chinese companies in U.S. courts for corporate governance violations. Nearly every time their plan is to sue the Chinese company for having violated their “minority shareholder rights” or for breaching fiduciary duties owed to them as fellow investors.

First, as we discussed in The China Stock Option Scam, it is not possible under Chinese law for a Chinese domestic company (as opposed to a WFOE or a Joint Venture) to have foreign shareholders. Second, even if — as is often the case — we are not dealing with a true case of foreigners purportedly owning shares in a Chinese company, the duty owed to the foreigners is going to be based on Chinese corporate governance laws, not those of the United States. When we tell our potential clients (and even their lawyers) this, their response is usually to say something like, “but our contract calls for disputes to be resolved in a U.S. Court. We thought we had a slam dunk.”

So what? A contract provision calling for disputes to be resolved in one country’s court should and does have little to no influence on the law that court will apply to the case. Most importantly, it is difficult to imagine a thoughtful American judge applying U.S. corporate governance law to a transaction that took place wholly in Mainland China and that involves Chinese entities.

I thought of these corporate governance cases today after reading a really nice analysis (by Dorsey lawyers Lanier Saperstein and Jeremy Schlosser) of the Second Circuit’s recent decision in the big Vitamin C Antitrust Litigation, holding that U.S. courts must “defer to a foreign government’s interpretation of its own laws.” In their analysis, these lawyers opine that this decision should hardly be a surprise and yet note how it will likely have far-reaching implications:

That should hardly be a controversial proposition, but up until now, lower courts have treated the interpretations of foreign governments regarding their own laws with varying degrees of deference, ranging from strict deference to outright skepticism. But now, the Second Circuit has put litigants on notice that the principles of international comity have to be applied in cases implicating the laws of other sovereign nations.

The Second Circuit’s ruling will affect a wide spectrum of legal issues facing foreign companies and financial institutions, ranging from subpoenas to asset restraints, and from enforcement actions to discovery requests, as well as substantive matters such as antitrust law, intellectual property, and securities laws.

Without going into the Vitamin C case facts and the Second Circuit’s legal ruling, I will just say that if any lawyer still believes that a U.S. court will apply U.S. law in sorting out a China-related corporate dispute, they are just wrong. If you are going to do a transaction in China that involves your getting equity or even profit-sharing from a China-based entity, China law is going to apply to any subsequent dispute you might have against that China-based entity. And this will be true regardless of whether or not your contract (or something else) entitles you to bring your dispute in a U.S. court.

So if you are going to do a deal involving getting equity in or profits from a Chinese company, you should at least know that China’s corporate governance laws put more value on the contracts you sign and less on  shareholder protection laws than the United States or Europe. What this means is that unless your contract explicitly provides you with protections, you probably have no protections. What this means in real life is that most of the time when American or European lawyers come to us with a China corporate case they are calling a “slam dunk,” it is anything but.

See also: China Contracts: Why Choice of Foreign Law is so Often a Bad Idea.