Header graphic for print

China Law Blog

China Law for Business

China’s New NGO Law and Calculating China Business Risks

Posted in Uncategorized
David Wolf on China NGOs, China law, and calculating China risks

David Wolf on China NGO law and calculating China business risks

There are a handful of China people (note that I am not using the term China expert) who just seem to nail China every time they write about it. And by nailing it, I mean that I read what they write and when I am done I think to myself little more than, “Yes.” And then my next thought is “I wish I had written that because that expresses better what I am thinking than anything I have written — or probably could write — on the topic. I had that reaction the other day to a Linkedin post by David Wolf, entitled, NGOs in China: Seeing through a Law, Darkly.

I have known David ever since we both were on an AmCham panel a long long time ago on the topic of writing about China. David has doing business in China since the 1980s and he has lived there for around 20 years. David is managing director of the Global China Practice for Allison+Partners LLC, and he just came out with a book Public Relations in China (published by Macmillan) in October. I have that book on order and I hope to eventually review it on here.

Back to David’s Linkedin post. The post is on NGOs but like so many good “micro” posts, its value goes way beyond that. It as a great post on Chinese law and, more particularly, on how foreign businesses should incorporate Chinese law into their business calculations. The other day a reporter asked me how foreign companies should plan their businesses in light of the TPP. This reporter wanted to know how a foreign business can make plans in light of the “huge uncertainty posed” by whether TPP will or will not pass and what it will mean for international businesses either way. I explained that businesses always operate in a world of risk (even the most local domestic business must deal with multiple risk factors) and that each business must  gather up as much information as it can to analyze TPP and then decide for itself how it might or might not impact its particular business. It then must act accordingly.

When I first saw David’s Linkedin post, I left the following comment: “Great article! I am sure I will at some point quote you on this: “As always with Chinese regulations, it is unwise to panic when word of new laws or policies are announced. Such occasions call for questions rather than statements, study rather than action, and engagement rather than estrangement.”

This is what I am talking about! So without further ado, here is David’s post:


Over the past six months, there has been a great deal of consternation about the new law being drafted in Beijing covering the operation of NGOs, both domestic non-profits and foreign organizations. The NGOs I work with have been, each for their own reasons, concerned about what to make of both the law itself, and, perhaps more important, what it signals about the broader policy environment around China’s nascent civil society.

As always with Chinese regulations, it is unwise to panic when word of new laws or policies are announced. Such occasions call for questions rather than statements, study rather than action, and engagement rather than estrangement. For a start, The Economist offers some clarification:

The draft law represents a mixture of limited progress and major party retrenchment in a sensitive area. Under Mao Zedong, China had no space for NGOs. But they have multiplied in the past decade to fill the gaps left by the party’s retreat from people’s daily lives. Officials say the law will help NGOs by giving them legal status, a valid claim. But it will also force strict constraints on foreign or foreign-supported groups. No funding from abroad will be allowed. And all NGOs will have to find an official sponsoring organisation. They will then have to register with China’s feared public security apparatus, which will now oversee the entire foreign-backed sector.

The article goes on to explain that while in practice the government may back off from enforcing some of the more draconian clauses, they will keep those provisos in place to use selectively against groups they seek to censure.

This means that international NGOs in China, from the American Chamber of Commerce to environmental organizations like Greenpeace, will live under a sharper Sword of Damocles than ever. Worse still, the law could be used as a device to quell discussion and debate about China abroad by holding an NGO’s right to operate in China hostage against better behavior overseas.

International NGOs operating in China not only need to understand how the law will regulate their operations in China, but also how the exigencies of their China operation may compel them to alter their behavior abroad. At some point, many NGOs will face a hard choice between sticking to their principles globally on one hand, and continuing to operate in China on the other.

The wiser NGOs will not wait for that choice to come, but will address it now, and preferably before even venturing into China. The sooner all of an NGO’s stakeholders understand the potential scenarios, the sooner the organization can delineate the terms under which it is – and is not – prepared to operate in China. This is also a good time for international NGOs to identify and engage their allies, partners, and supportive voices.

This is not to say that the worst will happen. China’s government is not a monolith, and there are regulators and bureaucrats in Beijing who understand that a healthy civil sector, and even a degree of foreign participation therein, is an essential part of the solution to many of the problems China has encountered in its development and growth.

But that support offers no guarantee against turbulence ahead. For international NGOs in China, the coming year should be spent preparing for the worst while working to make the situation better.

Copyright Takedowns in China

Posted in China Business, China Film Industry

China has a pretty good system for takedowns of copyright subject matter stored or posted online without the approval of the copyright owner. Our China lawyers are have helped motion picture producers, motion picture distributors, gaming companies and other copyright owners invoke this process and the results are generally good when the copyright owner is well prepared.

This is the first in a series of posts looking at online takedowns. In this post we provide a general summary of the regulations that establish the takedown procedures for copyright subject matter.

China take down notices.

Copyright takedowns in China

The copyright takedown regulations protect the right of “communication through an information network.” This right is one of several comprising the copyright in audiovisual recordings and sound recordings under Chinese copyright law. References below to “recordings” include both sound recordings and audiovisual recordings.

The right of communication through an information network means the right to make recordings available, by wire or wireless means, to members of the public from places, and at times, chosen by them individually. Making recordings available to the public through an information network requires permission of the right owner. The right owner is entitled to remuneration when the right is exercised.

The regulations apply to “network service providers” (网络服务提供者)and to “service recipients” (服务对象), but neither term is defined. A service recipient can be any person or any legal entity that causes content to be posted online.

There seem to be two kinds of network service providers: Internet access providers (IAPs) and Internet presence providers (IPPs).

IAPs are entities that provide access to the Internet. Examples of Chinese IAPs include China Telecom, China Mobile and China Netcom.

IPPs provide network space for users to upload information. They also provide search engine services. IPPs often provide the disk space, high-speed Internet connection, or even the web site design, for those wanting an Internet presence. Youku, v.qq.com and www.letv.com are examples of Chinese IPPs.

This is how the copyright takedown system applies to network service providers and service recipients:

  • The right owner may give written notice to the network service provider requiring the removal of a recording if the right owner believes that the information network is infringing the right by allowing the recording to be stored, searched or linked without approval. The notice must contain certain details, including preliminary proof of infringement.
  • After receiving a notice, the service provider must promptly remove the recording or disconnect the link. The service provider must then forward the notice to the service recipient.
  • The right owner is liable in damages if, as a result of a notice, the service provider wrongly removes or wrongly disconnects and this causes loss to the service recipient.
  • If the service recipient believes the network communication right has not been infringed it may deliver an explanatory statement to the service provider and request reinstatement of the recording or the link.
  • If the service provider receives such a statement it must promptly replace the recording or reinstate the link and then send the explanatory statement to the right holder.
  • On receiving an explanatory statement the right owner cannot issue a fresh complaint and would, we presume, need to initiate court proceedings to take the matter further.
  • A service provider that does not follow these procedures can be required to cease the infringement, issue an apology, eliminate the “bad effects” or compensate the right owner for losses. If the public interest is affected the authorities can confiscate any illegal gains and impose fines. In serious cases, computers and other equipment used to provide a network service can be confiscated.

The regulations draw a distinction between service providers that provide searching or linking services and those that provide storage space. The liabilities of each are different. We look at this distinction in our next post.

China Property Guide and the Rest of the World Too

Posted in Recommended Reading
Shanghai's French Concession. A nice place to live in Shanghai.

The French Concession: a nice place to live in Shanghai.

For years now, I have been recommending the Global Property Guide as a good first stop to my residential real estate developer clients and to anyone else who asks me about China residential real estate. I did so yet again today. And then I realized that I have never listed it on here for everyone else, so I am doing so now.

This site is a terrific first (maybe even second) stop for anyone interested in international residential real estate. Within its site it contains just about every residential real estate statistic and prediction on just about any country you could ever want.

If you are contemplating buying, selling, or renting a property in any major city in the world, I recommend you at least check out the Global Property Guide. It makes for a good initial China property guide as well, and here is their China real estate page.

Six Strategies for Exporting to Asia/China

Posted in China Business
It's a big world out there, so export. (Infographic is from FedEx)

It’s a big world out there, so export. (Infographic is from FedEx)

I love to talk about what I call our “accidental exporter” clients. These are companies (mostly in the United States, but also in Europe) who literally lucked out into becoming China exporters. And by “lucked out,” I mean that they were quietly going about their own business when literally out of the blue they were contacted by someone in China who wanted to buy their products and did, and then things took off from there. The interesting thing about this club is the diversity of the products they sell. The below are the ones that immediately spring to mind:

  • A relatively small, very high end cookie maker that was approached by a Chinese company in a completely unrelated industry about buying $800,000 worth of cookies every month. Our China lawyers thought this was so crazy that for weeks we all but forbid our client from doing anything beyond engaging in massive due diligence to make sure that the whole thing was not a fraud. It wasn’t.
  • A Midwest USA factory machine equipment company that makes million dollar machines that was approached out of nowhere by a large Chinese company and now this company sells 3-4 of its machines to China every year, without anyone from the company ever having set foot in China.
  • Many years ago, an East Coast Canadian environmental equipment company (I’m being intentionally vague here) was contacted by a quasi-competitor that makes similar (but different) equipment and told that a large Chinese municipality was looking for XYZ equipment and since the competitor did not make that equipment (but our client-to-be did), the competitor was letting our client know. Our client then sold at least five million dollars worth of its equipment.
  • And my favorite (and I wish I did not have to be so vague here), but a small (like $100,000 a month in total revenue small) Pacific Northwest woolen company (with a speciality) started becoming really popular with Asian consumers, like to the tune of amazingly quickly doubling their monthly sales from Asian consumers alone.

Now obviously most exporters to Asia have to do a lot more work to become Asia exporters than the above four companies, but I mention these four to highlight the plethora and the diversity of Asia export opportunities. If these four companies can succeed as exporters to Asia by accident, just imagine what companies that work at it can accomplish.

Anyway, I am focusing on exporting to Asia today because East-West Bank sent me a really good article listing out six good strategies (really more like tips) for exporting to Asia. Here are their six from their article, 6 Strategies for Exporting Successfully to Asia, with my comments.   

1. Assess your potential to export. If you are going to export to Asia (other than by accident), the first thing you need to determine is whether there is a market (and where) in Asia for your product. The E-W Bank article recommends you secure help on this from U.S. SBA Export Assistance Centers . and/or the U.S. Commercial Service. This is really good advice, and most (all?) European countries and U.S. States have similar offices that also can provide substantial assistance at sometimes ridiculously low prices. There are also many excellent consultants who provide similar and more in depth services.

2. Protect your ideas first. Protecting IP is the issue dearest to my heart and so I will just quote the whole thing from the article:

Asian countries have different laws regarding intellectual property than the United States does, so make sure you get legal advice on how to safeguard your brand and product before you start marketing it. “If you are going to mess up on anything, don’t mess up on your intellectual property,” says attorney Dan Harris, a partner and founder at Harris Moure PLLC in Seattle and author of the well-known China Law Blog. It can be very hard to undo the damage, by his account.

Some American exporters lose rights to their intellectual property in China, for instance, because they don’t realize they must actively file to protect their IP there – or it does not belong to them, says Harris. “Americans will go into China, sell on Tmall and all of a sudden, someone will have their name,” says Harris. “Then they will call us and say they want to sue this company in China.” These U.S. firms are generally out of luck, because they failed to register the Chinese version of their brand name in China, according to Harris. “The only exception is if you are a well-known brand, like Coca-Cola,” says Harris.

All true.

3. Invest in relationships. The article rightly recommends you “meet potential business associates and clients at least once before you make a deal, and ideally more than that.”  I agree. Oh, and choose your relationships wisely.

4. Proceed carefully with partnerships. This is the other issue closest to my heart and so I will quote liberally on this from the article:

[M]any U.S. companies look for a distributor to sell their products overseas. That can be a good approach if you don’t plan to open an office in the Asian country, but it is important to vet distributors carefully. Be wary of any distributor that demands an arrangement to sell exclusively in one country with no minimum sales requirement of your product. “They are probably selling for your competitor and will block you out of the market,” says Harris. “We have had brands blocked for years from China. Americans are so eager to get in there [that] they sign these agreements.”

If you plan to license your brand name to a distribution partner overseas, do you your due diligence—especially on the partner’s history of quality control—and invest in good legal advice on how to draft the agreement. “Americans fail to realize that a distributor can destroy their reputation,” says Harris. Some American companies have found that such a distributor has put their brand name on an inferior or even dangerous product, according to Harris. “They’ll try to stop the company from selling it, but their contract doesn’t allow them to,” he says. Enforcing even a carefully drafted contract can be tough. “It’s not as simple as people think,” he says.

All true.

5. Consider selling online. “If you sell a consumer product, marketing it through a large e-commerce marketplace – or more than one of them – may be the easiest way to break into Asian markets…. In addition to eBay, Amazon and Tmall, sites such as Alibaba.com, JD.com and exportnow.com work with American entrepreneurs. These sites make getting started on selling to China much much easier. However, two important things to know are that (1) you still need to protect your IP and (2) unless these sites really push your products, there is a good chance that they will simply languish.

6. Minimize financial risks. “If any disputes arise over sales you make from a distance, it will be harder to resolve them than if you and your client were both in the United States, operating under the same legal system. Many experts recommend getting trade receivables insurance and putting safeguards in place to make sure you get paid. Getting paid in full upfront is almost always best and easiest, but if that isn’t possible, try to get paid enough before you ship so that your costs of production and shipping are covered and you will at least break even even if you never receive any additional payments.

Just do it….

What strategies or tips would you add to the above?

China Employment Contracts and the Double Wage Penalty

Posted in Basics of China Business Law, Legal News
China Employment Contracts. Do them right.

China Employment Contracts. Do them right.

China’s labor laws mandate that China employers must have written employment contracts with all of their full-time employees. If an employer goes more than one month without having a written employment contract with an employee, the employer will be required to pay the employee double the employee’s monthly wage and immediately execute a written labor contract with the employee.

Essentially, PRC labor laws do not hold the employer “on the hook” for the first month without a written contract, instead the clock starts running the second month. For example, an employee who starts work on April 1, 2014 but does not enter into a written employment contract with the employee is not entitled to double wages for the month of April. In other words the employer gets a one month “free pass.”

But suppose there is still no written employment contract in place come May 1, 2014, and that continues to be the case. In that circumstance the employer will be liable to the employee for double the employee’s monthly wage for every month without a written contract. Is there any limit on how many months an employer must pay double wages for not having a written employment contract with an employee? Most jurisdictions end the double wage penalty after the first year (that is, 11 months, as the employer gets a “free pass” for the first month), but at that point the employer will be deemed to have entered into an open-term labor contract with that employee. And since this is about as close as one can get to lifetime employment this is not a situation in which any employer wants to find itself.

How long can an employee wait before pursuing a claim for double wages? The usual statute of limitations for China labor law disputes is one year. When though does this one-year clock start ticking? Some jurisdictions in China tend to categorize a double wage payment as labor compensation but others categorize it as a penalty for violating the law. If it’s the former, then the one year statute of limitations does not begin to run until after the employee ceases his or her employment. But if it’s the latter, the one year statute of limitations begins to run as soon as the employee knows or should have known the injury has occurred.

To make things even more complicated, some China labor arbitrators use a third method to calculate the one year statute of limitations. They calculate from the last day of the employee’s first year of employment.

Bottom line: It cannot be stressed enough: You should use a written employment contract with all your employees AND use an appropriate one. Oh and one more thing: just about anyone in China who is doing work on behalf of your company as an individual is your employee. For more on this, check out China’s Tax Authorities Want You.


China Film Revenue: Who Watches the Watchers?

Posted in China Film Industry

11/11/2015: This post has been updated to reflect that the MPAA did not make an announcement at the US-China Film Summit about the agreement referenced below.

As reported last week, the Motion Picture Association of America has signed an agreement with China Film Group Corporation that will allow US rights owners to realize more money from film exhibition in China.

The agreement was immediately hailed in the trades as solidifying and stabilizing the market for US films in China. And for good reason: if everything in the agreement comes to pass, it will be a significant step forward for US studios and other rights holders.

China Film Revenue: Is China finally addressing the elephant in the room?

China Film Revenue: Is China finally addressing the elephant in the room?

The agreement (titled, in typically awkward bureaucratese, “Agreement on Cooperation in Importation and Distribution of Revenue-Sharing Films,” or “分账影片进口发行合作协议”) addresses three longstanding sore points for US rights holders with respect to quota films (i.e., films that qualify as one of the 34 revenue-sharing films under China’s quota system):

  1. US rights holders will receive 25% of net revenue without any additional withholding for taxes or marketing expenses. Among other things, this addresses China Film Group’s unilateral move in 2013 to withhold a new VAT, which led to monthlong delays in the payment of hundreds of millions of dollars.
  1. US rights holders will get paid in reasonably timely fashion. This addresses the same situation noted above.
  1. US rights holders will be able to audit Chinese distributors, sub-distributors, and exhibitors with regard to ticket sales and revenue. This addresses, for example, last month’s revelation that Chinese exhibitors had misattributed millions of dollars in box office revenue so that a Chinese propaganda movie, The Hundred Regiments Offensive, would top the box office instead of Terminator: Genisys.

Much credit should go to the MPAA negotiators for getting China Film Group to execute an agreement. But this deal must also be viewed in context. China lost face when it got caught fudging at the box office, and at the same time they wanted to give face to the MPAA during the US-China Film Summit and the simultaneous China International Co-Production Film Screenings. It’s of a piece with last week’s announcement of a special task force to combat counterfeit Disney goods in China, which will give Disney face before next year’s launch of Shanghai Disney.

Moreover, this deal is not self-executing, and China has a long history of agreeing to implement reforms and not following through. IFTA, the consortium of independent film and television companies, has a laundry list of complaints about China’s failure to honor its WTO commitments.

Don’t get me wrong–it’s certainly better to have this agreement than nothing at all. And the language about auditing could prove to be the most influential of all. We have been fielding an increasing number of requests regarding the auditing of Chinese film producers, distributors and exhibitors, and not all of the requests have been from foreign companies. As more Chinese companies see the value in audits—and in drafting agreements that specifically address the accounting tricks in the Chinese film industry—enforcement will follow, and the benefits will redound to everyone.

China’s Film Industry Promotion Law: The New Draft

Posted in China Film Industry
China's Film Industry Promotion Law: The New Draft

China’s Film Industry Promotion Law: The New Draft

China’s National People’s Congress issued a draft of the Film Industry Promotion Law for public comment on November 6, 2015. The law is to apply to “film activities” such as film development, production, distribution and release within the PRC. The published annotations indicate the law is intended to simplify the regulation of screenplays, film productions and exhibitions and the holding of foreign-related film festivals.

Fundamental changes to the existing regulatory framework, as it affects foreigners, are not proposed in the draft law. Foreigners will still be prevented from engaging independently in film production in China. Foreigners will still be prevented from engaging in film distribution in China. No mention is made of any lifting of the quota on importing foreign films on a revenue-sharing basis. Still, many of the changes would definitely streamline the official co-production process for foreign producers. There is also now express official recognition of the need for improvements in the system of film finance and the need for tax incentives for local producers.

From our perspective as China film lawyers, the most interesting features of the draft law are as follows:

  • A screenplay will no longer be subject to approval if the film will deal with “general” themes. For such films it will only be necessary to file a synopsis. A screenplay review is still required for movies with “special” themes.
  • Production licenses will no longer be required for each individual film. Chinese enterprises with the “appropriate personnel, funds and other resources” will be allowed to engage in ongoing film production activities if they have approval from the relevant authorities at the provincial, regional or municipal level.
  • Approval after completion of production is still required but may be obtained from the authorities at the provincial, regional or municipal level.
  • Relevant authorities of the State Council must formulate applicable review standards and make them available to the public.
  • China will implement preferential tax policies to promote development of its film industry. Specific measures are to be promulgated by the tax authorities of the State Council.
  • Financial institutions are to be encouraged to provide financing services and film-related IP pledge services for film activities and improvement of film infrastructure. Insurance and completion guarantee companies are to be encouraged to develop the products needed to further develop China’s film industry.

Let us know what you’re hearing about the draft law.

China NNN Agreements: Make Sure Yours Bites

Posted in Basics of China Business Law, Legal News

Last week, in China NNN Agreements and How to Give Them Real Teeth, I wrote about how you need to put teeth into your China NNN agreements. But what happens when you do? We have found that the use of a properly drafted NNN agreement dramatically reduces infringement by Chinese factories and litigation relating to these issues. Why is that?

The reason is that Chinese companies are truly afraid of the Chinese court system. Chinese companies are not afraid of an order from a Chinese court telling them to behave properly. What they are afraid of is a judgement for a sum certain that will be enforced by a Chinese court by seizing and auctioning their factory assets. What they fear most is a prejudgment seizure of assets that ties up their factory property until the lawsuit is settled. These Chinese companies know that if they breach a well drafted China-centered NNN Agreement, the odds are very high that a Chinese court will order a freeze on their assets and that is the last thing they want.

China NNN Agreements: make sure yours bites.

Due to this fear of the court system, we encounter the following three responses from Chinese factories to our NNN agreements:

First, some Chinese companies will simply refuse to sign. These are the companies that planned to steal the foreign technology from the very beginning. I was recently represented an American company in a very difficult negotiation with a Chinese company on a technology licensing project that involved transferring trade secrets for an industrial process. After unfruitful talks that went on all morning, we reconvened after lunch, at which point the Chinese side announced:  “Look, it is very clear to everyone that the only reason we are interested in this venture is so that we can appropriate the technology of the U.S. company. We have reviewed the documents and it is very clear that he (pointing to me) will not let us do that. So let’s just stop the discussion right here and admit that we have nothing more to discuss.” And that was the end of it.

Some U.S. companies would have seen this as a failure of negotiation. In this case, however the owner of the U.S. company thanked me. He said that his Chinese staff were pushing him into a venture with which he was not comfortable. The confession of actual intent in front of his staff solved the internal problem and prevented his company from making a serious mistake. From this we can see that forcing the hand of the companies that have bad intentions from the start is probably the greatest benefit of a well drafted NNN agreement. I will note though that this sort of situation is quite rare.

Second, some Chinese companies will enter into serious discussion about specific matters they believe should be excluded from the scope of the NNN Agreement. This means they have read the NNN Agreement and they take it seriously, and because they take it seriously they insist that it be modified to reflect their own realities. In some cases, the Chinese company’s concerns are unfounded. But, in other cases, the Chinese company will reveal that they already have technology of their own in the same area that they need to protect.

This is a positive result, for several reasons. First, if the concerns of the Chinese company are unfounded, this provides advance notice that the factory will be unreasonable and difficult to deal with. Second, if the concerns are reasonable, this provides the grounds for more fruitful discussions between the two sides on the technical concerns of each party and these discussions often lead to more fruitful joint development of existing technology. In the past, U.S. companies simply assumed that the Chinese factory was without any technical base of their own. This is no longer true, requiring that the technical base of both sides be considered in any project involving new technology in China.

Third, and most common, the Chinese side will execute the NNN agreement and then treat the three obligations as a serious matter that must be approached with care. How does this work out in practice? It does not mean that every Chinese company will suddenly abandon years of bad practice and suddenly begin behaving well. What it does mean is that when the Chinese factory violates the rules, litigation is usually not required. In most cases, a reference to the NNN agreement and the credible threat of litigation is enough to induce the factory to reform its behavior and step back into line. This is particularly true in cases of disclosure to undisclosed third parties and to attempts at circumvention.

This then illustrates the general approach my firm’s China lawyers take with agreements in China. We do not want to litigate nor do we intend to litigate. Rather, we use the general fear of litigation and involvement with the courts to achieve a result that greatly reduces the likelihood of ever having to go to court. But to be able to reduce the likelihood of having to go to court it is essential that the Chinese side believe that it would be relatively easy for you to sue it and prevail. Most importantly, the Chinese side must believe that you can quickly and easily get a Chinese court to freeze its assets. If the threat of an enforceable money judgement in a Chinese court is not credible, then this strategy does not work. Chinese companies are experts at seeing through threats that are mere bluffs. So the foreign company needs to do it right. Teeth are not enough. You have to make the agreement bite.

For more on China NNN Agreements, I suggest you read the following, in order:

How To Protect Your Trade Secrets From China

Posted in Basics of China Business Law, Legal News

Our China lawyers draft more non-disclosure agreements (NDAs) than any other contract. We call our NDAs NNN Agreements because our clients nearly always need a lot more protection than an agreement that merely prohibits their Chinese counter-party from discussing our client’s trade secrets. The key component of our NNN Agreements is the non-compete portion, as it is that provision that protects our clients from using our client’s trade secrets to compete.

But even though our NNN Agreements are very effective at stopping Chinese companies from using our clients’ trade secrets, no agreement is fool-proof as every agreement to some extent relies on the good faith of its signers.

Tell no one in China your trade secrets unless and until you must

Tell no one in China your trade secrets unless and until you must

Which is why our China lawyers instruct our clients to do whatever they can to protect their trade secrets beyond having a good NNN Agreement. One thing we often discuss with our clients is how to minimize the likelihood of trade secret/IP theft at the beginning stages of their trying to decide who to use to manufacture their products. We urge that the meet with as few potential Chinese manufacturers as possible because every new company that learns our client’s trade secrets is a new threat to exploit those trade secrets. We also urge that our clients not reveal any trade names they may use in China without first filing to secure those trade names as China trademarks.

Most importantly, we urge our clients to reveal as little about the product as they can to get production quotes. What this means in real life is that if you are making a widget that is 98% standard in all respects, you get a quote for a standard widget and then reveal the other 2 % only to the Chinese widget manufacturers that came back with the quality and pricing requirements you seek. Why reveal your 2% to ten manufacturers when only three are really in the running for your business?

Of course how much you can reveal to get an accurate reading of the production capabilities and the pricing structures of your potential Chinese manufacturers will vary with the product and your secrecy needs.

Bottom Line: Before you get on the airplane to meet with your potential China manufacturers, you should figure out the bare minimum you are going to reveal to those manufacturers and have in place the protections you need to protect that which you will be revealing. It really is that simple.

Doing Business In China: It Crosses Sectors

Posted in China Business

As much as I love it when one of the China lawyers in my firm “writes” a blog post by cc’ing me on an email, I like it even more when a blog reader does the same via email. The below is just such an email/post, sent to me for my comment. My comment is that I agree with what you say and more than anything I would like to hear what others say.

Here it is:

China Law Blog seeks harmony with its readers

Our views on doing business in China harmonize with this reader’s views.

Hi Dan,

Long-time China Law Blog follower. I’ve recommended it as essential reading to many of my colleagues/clients/suppliers/friends working in the legal and commercial areas in China.

Came across an interesting interview with Archie Hamilton who runs a music promotion business (SplitWorks) out of Shanghai that I have been sharing with others, and thought it might be interesting to you and potentially your other blog readers.

I have come to the conclusion that while it is focused on the music business there are many points that can be extrapolated to the other business sectors and in some cases to doing business in China as a whole. Many of the take-aways I got from it overlap considerably with many of the points you frequently raise on your blog.

Some points that I found interesting (or at least my interpretation of them), in no particular order are:

  • Foreign consumer businesses are cycling through phases of foreigner or local hiring cycles, as they gyrate between needing foreign staff (who understand their brand/business but don’t know the China market) or local staff (who know the China market but don’t know their brand/business).
  • How the 2nd and 3rd tier cities are increasingly becoming important in terms of opportunities.
  • The impact of rapidly changing attitudes and sophistication in the younger generations of Chinese, where the “new kids” have a greater awareness and understanding of what is being pushed to them via branding/marketing/advertising and how they are slowly starting to reject it meaning brands will have to change their approach if they want to reach them.
  • The impact of the corruption crackdown and how it is changing how the Chinese media operate.
  • The importance of the rule of law and the necessity to take the time to understand Chinese law and comply with it. Also the fact that Chinese government authorities typically are aware and do understand what is going on, and are slowly changing the regulations to keep up with what is actually happening. They are pragmatic in dealing with new situations but still retain control and are willing to step in if they do not like what is happening.

For me, I see evidence of those points on a regular basis in the area that I work in, which is about as far from the music business as you can get.

I don’t think there is anything new to you in the above, but I was somewhat surprised how such a different sector can be experiencing many of the same trends apparent in other sectors. For me this reinforces that there is a change happening on a macro level in China that is having real and lasting effects on the nation as a whole.