China Media and Entertainment LawOur lead China media and entertainment lawyer out of Beijing, Mathew Alderson, was recently interviewed for a VICE Sports story by Joshua Bateman, entitled, The UFC With Chinese Characteristics. The full text of the interview is below, with the publisher’s kind approval.

Alderson: I understand the UFC [Ultimate Fighting Championship] business is to be conducted by a Nevada LLC. The company promotes and produces mixed martial arts events broadcast free-to-air or through subscription services. I understand the company to have a broadcast deal with Fox Sports. The company is reportedly in discussions with Chinese buyers or investors. You are therefore interested in the effect Chinese ownership or investment may have on the management and regulation of the company.

At the outset, it should be appreciated that Chinese ownership of the Nevada LLC (or any other non-PRC company) would not, of itself, bring the company under Chinese regulation. The company would continue to be subject to regulation in the place in which it is established (Nevada and the United States) and the place or places in which it conducts business. The UFC would only become subject to Chinese regulation to the extent it conducts business in China. As a foreign company, the UFC could only promote its events in China with the assistance of a local partner with the necessary permits and licenses. Production of TV programs in China would also require the assistance of such a partner, probably a local co-producer. This is because foreign investment is restricted in the sectors in which UFC operates.

I answer your questions with these introductory remarks in mind.

VICE Sports: Is it possible Chinese regulators would view the UFC as a media company, and that would impact investment opportunities or how the company is regulated in China?

Alderson: Yes, it is possible because the UFC business model involves promoting live events and producing and broadcasting TV programs. These are sectors in which foreign investment is restricted. The impact would depend on whether the UFC established an entity in China and whether that entity is wholly Chinese or partly foreign-invested. A foreign-invested entity would attract greater scrutiny. The impact would be less if the Chinese market were approached by licensing content into China.

VICE Sports: If the UFC were to be acquired or were to accept investment from a Chinese company, would there be political/regulatory pressure in China for the company to alter its management or board structure to have more Chinese representation?

Alderson: Again, it would depend on where the company is operating and where the investment is made. There would be more scope for such pressure if a unit of the company were established in China, whether as a fully Chinese company or as a foreign-invested company. It would be much harder for Chinese owners to exert, or be subject to, this kind of pressure in holdings outside of China; although, if they had the necessary voting rights, Chinese owners could — like any investors — control or at least influence management abroad.

VICE Sports: If current UFC ownership does not sell the company but instead attempts to expand in China going forward, could they do so on their own or would they most likely need to join forces with a Chinese partner?

Alderson: They would need Chinese partners because foreign investment is restricted in the sectors in which they would likely be operating. The most likely business models are joint ventures and co-productions.

China trademarks
China trademarks are worth way more than their weight in gold.

I spend a huge portion of my waking hours talking to companies doing business in China or looking to do business in or with China. One of the things I virtually always try to discuss with all potential and actual clients at least once (and usually during our first conversation) is the need for them to protect their IP in China. Maybe one out of fifty of our clients has no IP to protect, but the rest do and it is surprising how many of them do not realize the need for them to do so when dealing with China.

Above of all else, I talk about the importance of filing for trademarks in China and how if you don’t get your trade names and logos registered as trademarks in China, someone else eventually will and then you will be facing all kinds of trouble. And then I talk about the trouble. That is nearly always enough to convince Western companies of the need for a China trademark.

But the other day I was talking with a very young, super-smart owner of a start up tech company and after I recited my “trouble speech” on China trademarks, he asked me why trademarks are important. As he put it, “I understand that someone else could end up with our trademark in China, but why are trademarks so valuable in the first place?

“Great question,” I responded and then asked him what kind of car he drives. He said BMW (I was all but counting on this) and then I proceeded to ask him if he knows or even cares how many patents BMW has on the car he drives and of course he did not. I then asked him what then made his BMW distinctive enough that he would buy that car over, let’s say a Honda. His response was that he knows BMW makes great cars. I then explained that he knows BMW makes great cars and he knows his car is a BMW because it is the only car company in the United States (and in China too, I presume) that can brand its cars “BMW.”

Fortunately, he seemed satisfied with my answer. But, really, what makes a trademark so potentially valuable? Some or all of the following:

  • Your trademark can give your business its identity.
  • Your trademark can give your goods or services brand recognition.
  • Your trademark distinguishes your goods or services from others in the marketplace.
  • Your trademark can be used to stop others from using (infringing on) your name or your logo.
  • Your trademark can be used to show that you own a particular name or logo.
  • You can license or sell your trademark.

Did I miss anything?

China patentOn Tuesday one week ago, the Financial Times’s Beyondbrics blog published a very interesting piece by China First Capital’s Peter Fuhrman on innovation in mainland China as compared to Taiwan. The piece focused on the push-back Fuhrman experienced after an article he co-wrote holding up a Taiwan-based company (Largan Precision) as an example of a high-tech, high-net-profit business of the kind mainland China has yet to produce. The thrust of Fuhrman’s piece — that innovation is something that cannot be simply created overnight by government mandate — is something with which I heartily agree, but some of the things he says about China’s patent system bear further discussion.

First there’s this:

There are specialist patent courts now to enforce China’s domestic patent regime. But, the whole system is still weakly administered. Chinese courts are not fully independent of political influence.

And anyway, even if one does win a patent case and get a judgment against a Chinese infringer, it’s usually all but impossible to collect on any monetary compensation or prevent the loser from starting up again under another name in a different province.

Though it’s generally true that China’s courts (and the courts of many other countries) can be subject to political influence, at least in my experience, in 95%, maybe 99% of cases this will not be an issue for anyone attempting to enforce patent rights in mainland China. If this were truly a common factor, one would expect China court decisions to show a bias against foreign litigants, but studies have failed to find any such bias. Yes, it is possible for low-level patent infringers to simply abscond, avoid paying damages, and set up elsewhere — I would say this is especially an issue for trademark infringement — but this is rarely an issue for the much larger companies that are typically the subject of patent infringement cases. Though it’s difficult to make hard-and-fast judgements about which countries are better at enforcing IP rights, I have not found any major difference between Taiwan and mainland China in this regard. If Taiwan is better, it is not overwhelmingly so.

Then there’s this:

Another troubling component of China’s patent system: it awards so-called “use patents” along with “invention patents”. This allows for a high degree of mischief. A company can seek patent protection for putting someone else’s technology to a different use, or making it in a different way.

There are two ways to view this statement, to both of which I take exception.

The first is that Fuhrman is talking about so-called “new use” patents, that is patents that claim a new, inventive use of a known article. A classic example of this would include using a known lubricating oil to treat a disease. I think most people would agree that discovering such a new use, where it would not have been obvious (Chinese law is stricter in this regard than say, US law), is exactly the kind of innovation patent systems exist to protect and encourage. It is also possible to patent such inventions in Taiwan and (as far as I know) every other country in the world with a functioning patent system. The same is true of new ways to make a known article. Where the new way is inventive/non-obvious and advantageous, why shouldn’t you be able to patent this improvement?

The second is that Fuhrman is talking about so-called Utility Model patents or innovation (as opposed to invention) patents. Though laws vary between countries that grant Utility Model patents, they are typically designed to protect innovations that do not fulfill the requirements for patent protection (e.g., they may be obvious/non-inventive), but which are still new. The rights granted by such Utility Model patents usually are much more narrow, and the monopoly period is shorter, and they are not examined. Though Utility Model patents can be controversial, particularly because they theoretically can lead to someone being able to file something that, on the face of it, could even cover the wheel (and did, in Australia) utility models exist in many countries that have thriving tech industries, including Taiwan. The fact that so-called “paper-tiger” applications have been filed that appear to cover well-known technology, but which are in fact completely unenforceable, hasn’t deterred innovation in countries with Utility Model systems.

Finally there’s this:

It’s axiomatic that countries without a reliable way to protect valuable inventions and proprietary technology will always end up with less of both. Compounding the problem in China, non-compete and non-disclosure agreements are usually unenforceable. Employees and subcontractors pilfer confidential information and start up in business with impunity.

China Law Blog has written at great length about how to craft enforceable non-compete/non-disclosure agreements so as to protect your business and its IP in China, so I’m not going to say much except that in my experience Fuhrman is only correct about such agreements being “usually unenforceable” in as much as people are using agreements that simply aren’t written so as to be enforceable in China. The same is true of issues with employees and subcontractors; it comes down to the contracts you have had them sign and how you’ve decided to work with them and how you’ve gone about your due diligence.

Bottom line: yes, China does have a patent system that you can use to protect your inventions. No, if anything is holding back innovation in mainland China relative to Taiwan, it is probably not mainland China’s patent system.

* The above is a guest post from Gilman Grundy, a Senior IP Specialist for domestic appliances company Kenwood Ltd, which is part of the De’Longhi Group. The views expressed by Gilman are his own.

China contractWhen my law firm writes contracts for our American and European clients doing business in China or with China, we write the contracts in both Chinese and in English. We do not translate these contracts into Chinese. Let me explain this distinction because it is a very important one.

We price many of the more routine China contracts on a flat fee basis, and that fee includes our drafting the contract in English for our client’s review, and then putting that same contract into Chinese, as its official language. But every so often, one of our clients will ask what we would charge if we were to draft the contract in “just English” and allow the client’s “fluent Chinese” speaker to translate it into Chinese. I usually respond by joking that we not only do not give any reduction, we actually increase the fee by $5000 to help cover our increased risk of a legal malpractice lawsuit. I then tell them that in reality we simply cannot agree to anyone outside our firm drafting the Chinese version.

Why do I say this?

Because every word matters in a contract and this is as true in Chinese as it is in any language. Words have very particularized meanings in contracts and those meanings are sometimes different in a contract than in real life. Contracts also have terms that have become recognized and defined over time. The only people who can truly know how to use these specialized and particular words and terms are lawyers who know both China’s contract laws and who are completely fluent in written and spoken Chinese. On top of this, it is critical that the Chinese version explicitly reflect our client’s goals. To put it another way, we pretty much never see a “translated” contract that works as intended.

We draft our Chinese language contracts in Chinese so that they can be understood by our client’s Chinese counter-party and so that if there is ever a dispute and our client finds itself before a judge or an arbitrator in China, that judge or arbitrator also can understand the Chinese language contract in the context of Chinese law.

China employment arbitration
China employment arbitration is usually a losing battle.

Every few weeks one of our China lawyers will get an email from a foreign company (virtually always a WFOE) that is in a dispute with its China employee. They usually are surprised that they are in the dispute because they are of the view that they did nothing wrong. They too often believe that hiring us will involve us spending an hour or two reviewing the facts and the law and then telling them that they did nothing wrong and then make the case go away.

It most emphatically does not work that way. In fact, in almost all instances when we are brought on to help a foreign company involved in an employee dispute, our advice is to reach an agreement with the employee and then memorialize that agreement with a Chinese language settlement agreement that will make sure there will be no future problems with that employee.

I was cc’ed on an email recently that describes how difficult and expensive these cases can be:

I think it important I be upfront on how we view China employment arbitration cases. We view them as typically unwinnable and nearly always not worth the money to fight.

Take your Qingdao matter. For us to sort through all of the factual and legal issues could end up costing you $10,000. And once we sort through all of them, the odds are good that the best we can tell you is that you have some of chance to prevail on a few of them, virtually no chance to prevail on most of them, and absolutely no chance to prevail on some of them. Employers only very seldom win against their China employees, foreign employers even less so. And with the recent downturn in China’s economy, the odds for employers have gotten even worse. And if you did anything wrong in shutting down your office (and the odds are good that you did), your chances will be even lower.

And then there is the cost of preparing for the arbitration and arbitrating.

So what we suggest our clients do in these situations is try to settle these cases, with all employees. And we have never not succeeded in settling such cases, usually for about half of what the employee is originally seeking. Generally, Chinese employees want quick money and want to get on with their lives, believing that they can (and often already have) get another job. The down economy my impact this thinking somewhat, but interestingly enough, past downturns have really not. So if you were to retain us, the first thing we would do is some quick research on the issues. Not anything approaching the $10,000 worth of research necessary to make arguments to an arbitration panel, but just enough to be able to have a really good idea of the employees’ weak points that we can highlight in settlement talks. And then we work to settle and then when we settle we document the settlement in such a way as to ensure that the employees do not return.

We would also want to look into the issues with your other employees at your other locations as well, to try to nip potential problems there in the bud. The earlier you can resolve these sorts of issues with employees the better. We have handled a number of office closings, including in Qingdao, and we like to settle with the employees before the closing even happens, when they have a few more months even to work and are feeling safe. I assume we are too late to do that here with your ________ office, but the sooner we deal with the other employees, the less this all is going to cost you.

If you agree with the above approach, we should talk some more. If you do not, well then you should not retain us. Either way, I wish you the best with this difficult situation.

China LawyersWe got a whole new look today. For two reasons. One, we needed to change to look better on mobile devices, which is where about half of you now read us these days. And two, because it was simply about time.

We tried for a new look that at least has a nod to our old look. Do you like it. It was designed by our good friends over at LexBlog.

If the stars had aligned, our new look would be coming out on our tenth anniversary, but that day passed on January 4, with nary a mention — I forgot! Continue Reading Do You Like Our New Look, Ten Years On?

China employee probationChina’s labor laws allow employers to set a probation period for an employee to see if the employee works out for the company. Before the probation period ends, if the employer can prove that the employee does not meet its recruitment requirements, the employer can unilaterally terminate the employee without having to pay statutory severance. However, to prevent the employer from abusing such probation periods, Chinese law makes clear that the employer may set only one probation period for the same employee and it imposes a limitation on how long the probation may be. The rule on the maximum length of the probation period is not very complicated and can be found here. Nonetheless, if you don’t set it right, things can get complicated and messy fast and you may find yourself at risk. We have reviewed many offer letters and employment contracts that provide for a term of probation period that does not comply with China’s employee probation laws.

As noted before, the employer is permitted to unilaterally terminate employees that do not satisfy the conditions of employment during the probation period without having to pay severance. Now consider this: an employer sets a probation period longer than the statutory maximum, and before the term of probation period ends (but after the statutory maximum period has passed), it decides to terminate the employee because the employee failed to meet the conditions of employment. Can the employer legally do that? Probably not, because the remaining probation period is no longer considered a probation period under China’s labor laws, and the employee is thus no longer on probation and this specific ground for termination no longer exists. Can the employer still terminate the employee? It depends on the circumstances AND on the jurisdiction. Among other things, it depends on whether a permissible ground exists that justifies the termination and if the employer is able to prove it.

Another big issue is compensation. Suppose that the employer sets a probation period longer than the statutory maximum and the employment contract provides a basic salary during the probation period and a higher salary after that period. The employee continues to work after he or she has completed the probation period. Because the probation period in the employment contract does not comply with China’s employee probation laws, the employer will owe the employee the wage difference for the period between the statutory maximum and the probation period specified in the contract. In addition, the employer could also face an administrative penalty from the labor authorities.

If your specified probation period is longer than the statutory maximum, your company may also be at risk when it seeks to extend this period. For starters, even where the agreed-upon probation period is within the legal limit, the extension of such probation period may be illegal in your location. Furthermore, you may be exposing your company to additional risks if you extend a probation period that already violates the law.

And oh, just because the employee is on probation (and you don’t know if the employee is going to work out) does not mean you can wait until the employee passes the evaluation/performance review to enter into a written employment contract with him or her. For more on the importance of having a current written employment contract, see here.

Bottom line: Make sure your employment contracts comply Chinese law and it is better to do this before it is executed rather than after. All of the examples we gave above were based on China employment matters I handled, usually in a crisis, and usually at a cost way more than we would have charged had the company sought our employment law assistance at the very beginning.

China Manufacturing Contracts Interesting article in today’s Wall Street Journal by Mark Magnier, entitled, How China Is Changing Its Manufacturing Strategy. The article deals with how China cost increases are slowly eroding its low end manufacturing base and how the Chinese government is seeking to replace that with higher end manufacturing. Not much new with this, but the article does a terrific job explaining how this is happening and even not happening in China, including with the following numbers:

  1. “China doesn’t release data on factory closings or relocations. But according to an analysis by researcher Justina Yung of Hong Kong Polytechnic University for the Federation of Hong Kong Industries trade group, the number of factories owned by Hong Kong companies in the Pearl River Delta near Hong Kong fell by a third to 32,000 in 2013 from a 2006 peak. Many of those that left moved to lower-wage countries.”
  2. “Labor costs in China have grown faster than consumer inflation for years, according to consultancy BMI Research, and are currently nearly four times those in Bangladesh, Laos, Cambodia and Myanmar.”

The article also notes how “China has managed to hold on to low-end industry far longer than its Asian neighbors at a similar stage of development,” thanks in large part to “government incentives, subsidies, the large domestic market and good infrastructure that encourage companies to remain onshore.”

The article also discusses how China’s slow move away from low-end manufacturing is costing jobs and it ends with the following quote from a Sina Weibo user: “Low-end manufacturing goes to Southeast Asia while high-end industries go back to North America and Europe. We migrant workers can’t find jobs.”

With graphs, the article shows how some of China’s apparel and shoe manufacturing has moved elsewhere in Asia, but again, not that much.

Our China lawyers have been seeing the following:

  • Many manufacturing companies in China have always been owned by companies out of Taiwan and Hong Kong.
  • We are getting far fewer new clients going to China to have their apparel, shoes or rubber ducky type toys manufactured in China.
  • We are getting far more new clients going to China to have far more sophisticated products manufactured in China.
  • A much higher percentage of the sophisticated China manufacturers seem to be owned by Hong Kong and Taiwan companies than was the case with the apparel and shoe companies of years past. This is particularly true of the (mostly Shenzhen) Chinese companies involved in manufacturing internet of things products.

What we China lawyer geeks find so fascinating about these shifts in China manufacturing is how much they have complicated the legal and IP issues both on the high and on the low end. On the high end, we have to deal with complicated quality issues and issues revolving around who owns what when it comes to the IP. When manufacturing socks, IP is not that big a deal and certainly not terribly complicated. But when manufacturing a product with hundreds of components that has been jointly developed (or at least refined for manufacturing) by both the Chinese manufacturer and our client, the IP issues can seem nearly infinite. For more on this, check out China and The Internet of Things: Who Owns What?

But surprisingly enough, we are also finding that low end manufacturing is getting more complicated as well. Take socks as the example. Ten years ago, we drafted a relatively simple manufacturing agreement between our client and the Chinese manufacturer and that was that. That agreement would make clear that the Chinese company and its factory were not to manufacture or sell the same socks to anyone else and that the quality had to meet XYZ standards and if it didn’t, then ____ would happen. But now what we are seeing a lot more often is that even a sock manufacturing deal with a Chinese company will involve a Vietnamese subsidiary that might make some of the socks. So with whom do we draft the agreement? Just the Chinese company? Just the Vietnamese company? Or both? And if both, what law applies? You get the picture, right?

What are you seeing out there?

Negotiating with Chinese companiesThis is the second in a series of posts in response to emails and comments asking us to expound upon how Western companies can better negotiate with Chinese companies on technology deals.

In part one, Negotiating With Chinese Companies: Be The Rabbit, I talked about using the Zen technique of “being the rabbit,” which in Western terms translates mostly into just being patient, hanging back and letting the Chinese side start negotiating with itself. In response to that post, I received the following email from a China business consultant I greatly respect who has been in China for at least twenty years:

I liked the post on negotiating with Chinese companies. I found the best trick is to lay out terms and when the Chinese side balks, be super polite and say when you can agree to these terms please, email, call or text me. Then give them your card and leave. I always tell people the mentality of bargaining in China is the same whether buying fruit on the street, clothing in a market or doing mega deals in the boardroom. A lot of people act like they are dealing with a Japanese company. They are not. You have to have a walking away point in place before you start so that you don’t lose your cool.

Most of the negotiating techniques we are seeing Chinese technology companies employ are similar to those we have seen Chinese companies employ for decades. A classic example of an old tactic Chinese technology companies seem to constantly employ is to “lure” in Western companies to do a deal by promising the moon and then backing down from nearly every promise with each new contract draft. The best response to this tactic is usually a simple statement that you will not agree to the change and then to wait. In other words, be patient and be prepared to walk.

We are also seeing massive Chinese technology companies agreeing to a do deals with Western companies and then at some subsequent point in the negotiations substituting in some other “related” company as the signatory for the contract instead of the massive Chinese technology company. The company substituted in for the massive company is usually a brand new company created just for this one deal. When we explain that our client wants to do the deal with the massive and well-funded company and not the newly created one, we get pushback and excuses.

The Chinese technology company will claim that it “needs” to do it this way for IPO purposes or for investor purposes or because it will be able to move quicker this way. They will sometimes mouth platitudes about how “it doesn’t matter because the big company will be behind it all anyway,” but when we ask them to have the big company give its own guarantees on the deal, the big company balks. The only way to handle this sort of company switch is to be patient and 1) be willing to convey from day one that you are willing to walk and 2) actually be willing to walk.

 

China technology licensingAs we keep saying here on the blog, Chinese companies in the last year or so have taken to trying to buy U.S. technology via just about any means possible. And as that has been occurring, we have been detailing how risky this can be for foreign companies with the technology Chinese companies want. Our previous blog posts have mostly explained the legal issues and traps these foreign companies so often find or put themselves. See Manufacturing in China: Do Not Be “Assimilated”China and The Internet of Things and How to Destroy Your Own Company, and Selling Or Licensing Your Technology or Your Technology Business to China: Buckle Up For Some Seriously Tough Negotiating.

In response to our posts — both via comments and via emails –we have been getting requests that we explain how exactly foreign companies should respond to Chinese negotiating tactics. This post is part 1 of what will be a multi-part series on how to negotiate with Chinese companies on technology deals — or really, any sort of deal. This part 1 is not so much geared to provide strategies, but to change mindsets.

The first thing you need to realize if you are going to be negotiating with Chinese companies (technology or otherwise) is that you need to stop bargaining like a Westerner and to fully recognize that your Chinese counterpart sure as heck is not going to bargain in any way approaching what you view as fair. And if you can’t deal with that, you will pay the price.

Or as my friend Andrew Hupert likes to put it, you are the cow and no one “buys the cow when they can get the milk for free. In China, technology, IP and business methodology is the milk of profitable transactions. If you’re giving it away too early or too cheaply, then you are the expensive cow no one buys. Sorry.”

Many years ago, I had a very smart Westerner for a client who was very much into Zen Buddhism. With him we were negotiating a really tough deal with a Chinese company and every time the Chinese company would stall or push too hard or lie or agree to nine out of ten things one day and then three out of the same ten things the next day (all very common negotiating techniques of Chinese companies), my client’s response would be, “we will be the rabbit.”

According to this client, “being the rabbit” was a Zen concept of fighting back by not fighting at all, like a rabbit that goes limp when attacked by an eagle. So when the Chinese company would come back with massive changes from the day before, my client would send the Chinese company a really nice email saying something like, “I completely understand your new position and we will be reviewing it and responding when appropriate.” And then he would do nothing. Zero. Nada. Instead, he would just wait weeks and weeks until the Chinese company would come back and accuse him of having delayed this deal that needed to close so quickly. At that point, my client would say something like, I understand why you are in such a rush but we are not so if you can think of any way we might be able to speed this up, please let me know. The Chinese company would get so frustrated that it would start negotiating against itself and once it had reached the end of the line on that, my client would start negotiating again. I got the sense the Chinese company was simply not used to a Western company displaying Zen-like patience and it clearly was both irritating them and throwing them way off their game.

“Be the rabbit” is one tool among many that Western companies can employ when negotiating with Chinese companies. We will be providing more tools as this series continues.