China employment lawyersAs the end of the year is fast approaching, regardless of whether you are conducting a year-end employer-employee audit, now is a good time to update and refine your China employee rules and regulations. As this is usually (and should be) a much longer document than your employee contracts, doing this will probably take a fair amount of work. To make this task just a little bit easier, I suggest you focus on the following eight basic things to do to whip your China employee rules and regulations into shape for the new year:

  1. Make sure the Chinese version of your document is in tip-top shape. Far too many companies have a non-lawyer translate their rules and regulations into Chinese and far too many companies therefore have Chinese language rules and regulations that are not appropriately written for a court or other tribunal. Make sure this is not the case for yours and while you are doing so, check it for typos, etc. You should also make sure that your Chinese version lines up with your English version. For example, if your English version says “do not”, and your Chinese says “do,” you know there is something wrong (I see this sort of basic error all the time when conducting employer-employee audits).
  2. If your company’s rules and regulations are in Chinese only, you really should have an English translation done. You as the employer will need to refer to this document when you make most employee decisions and unless all of your employees who will be making these decisions are fluent in written Chinese, you need a well-written version in English as well.
  3. Focus first on the sections of your rules and regulations that matter most to your managing your China employees. This means you can for the most part gloss over any mission statement. Focus instead on sections where any failure to follow that which is written will get you into big trouble. When I am asked by a company to review their rules and regulations to let them know if it will work for China, the first thing I look at is the section on disciplinary actions because it is that section which is so often litigated. If that section is not well-crafted, I immediately know revising the rules and regulations is in order.
  4. If there is a section of your rules and regulations on which your employees are frequently commenting, questioning or voicing their concerns, this is a section you should be reviewing and probably revising.
  5. If you are seeing employee infractions that are not well addressed or addressed at all in your rules and regulations, put something in there for those or fix what is already there. Do this before one of your employees commits this infraction again you find yourself (again) in a situation where you are powerless to do something about it.
  6. Make sure you use the appropriate word/phrase in your rules and regulations to actually accomplish what you are seeking to accomplish. If you want to impose an obligation on your employees, make sure you use the word “must” and as noted above, make sure the Chinese version also says “must.” Saying “employees are expected to do something” does not usually cut it, and yet our China employment lawyers see language like this all the time in rules and regulations. If all you want to do is encourage your employees to do something, fine, but your rules and regulations are almost never the best (or even the right) place to do that. The rules and regulations are called rules and regulations for a reason and they should be used to clearly delineate what your employees must do and must not do and to make clear the repercussions for violations. If your rules and regulations say “DO NOT DO XXX!!!”, and then do not make clear that doing XXX will lead to termination, you likely cannot legally terminate an employee who does XXX no matter how large the font or how many exclamation points you use.
  7. Remove from your rules and regulations anything that no longer complies with China’s ever shifting labor laws. And when I say China labor laws, I mean any applicable national, regional or local law. See China Employment Law: Local and Not So Simple. Just by way of one very common example: if your rules and regulations provide for termination for an infraction that is not a terminable offense where your employees are located, there is a good chance you will engage in ineffective terminations that waste your company a lot of time and money by creating unnecessary employee-employer disputes.
  8. Make sure your rules and regulations clearly spell out incentives, bonuses and benefits and if your rules and regulations say that you will be providing any of these, you really should provide them. Well over half the rules and regulations we review or audit need substantial cleaning up of these provisions and a good portion of the China labor law disputes on which our China labor lawyers are retained involve these sections.

Bottom line: If you have employees in China, resolve to clean up and improve upon your employee rules and regulations by the New Year.

China lawyersOn this Thanksgiving Day, we want to take a time out to express those things related to China for which we are thankful. Just to be clear, we are focusing on China, not because we think China takes priority over everything else (because it does not), but merely because this is a China blog. So with that caveat, here goes:

1. We are thankful for our readers, here and on our Linkedin and Facebook pages. We are thankful for your loyalty and we are especially thankful for being able to interact with you. We are thankful for your comments and your emails, from which we learn all sorts of new things and from which we are challenged. But most of all, we are thankful and we are honored that you trust us for your information. Before we even started this blog, way back in January, 2006, we wrote the following Mission Statement for it:

We want to start a conversation with, for and about the person who wants practical information on starting and growing a business in or involved with China.

We will be challenging various misconceptions the West has about law in China, including that the law in China does not really matter or that guanxi can supplant it. We will help you figure out how you can use the law as both a shield and a sword. We will give insights to achieve practical solutions, while doing our best to entertain. We know lawyers are not popular, and though we are ourselves really quite likable, we recognize the need to avoid those things that incite lawyer hatred. We will strive to avoid legal jargon and namby-pamby language that attempts to camouflage our views or to avoid controversy.

We want our blog to be a place for both conversation and controversy. We expect many of you will disagree with us much of the time and we are fine with that. We will always strive to avoid boring you or being unwilling to take a stand. We are not going to be afraid of being wrong—in fact, we want you to tell us when and how we are wrong. If you want “legalese” or long strings of caveats, you are going to have to pay exorbitant legal fees to get that elsewhere.

We will tell you more than just that the law is this and this is what needs to be done to comply. We will discuss how the laws as written may say one thing, but our experience dictates something else. We will tell you when you need to do more than just follow the law to succeed, and we will set out exactly what that something else is. We will regale you with stories about the Chinese lawyers with whom we work, the foreign and Chinese businesspeople with whom we deal, and even the places we go. There will be times where our lawyer ethical rules will make us unable to name names, but we will always work to tell the full story.

It has become a blog cliché to implore readers for their input, but it is so important we must join the crowd on this. We do not purport to know everything about Chinese law. That is impossible. Our strengths are forming companies in Chinadrafting international contracts with Chinese companies (in English and in Chinese), intellectual property protection and international litigation and arbitration. We welcome your comments, suggestions and ideas on any area of law relating to conducting business in China. China is anything but monolithic and we will be relying in large part on you, our readers, to round out this site with your own stories.

In plain language, we ask that you write us early and often. We will review your comments before we post them, but that does NOT mean you should not criticize us or disagree with us. Our review will be to filter out comments that are without substance and/or personally abusive. We want to encourage a high level of discussion, but we will not ban or delete your comments just because you come after us.

You, our readers, have exceeded our wildest dreams by not only commenting often, but commenting with intelligence.

2. We are thankful that whenever relations between the United States seem to be on the brink, both countries seem to re-realize the importance of the other and pull back, even if just a little.

3. We are thankful for each and every award we have received, both as China bloggers and as China lawyers because we know none of those would have been possible without you.

4. Most of all, we are thankful for all the great friends we have made through this blog and through our work, who are far far far too numerous to mention. You are our everything.

Again, thank you from all of us (both in the U.S. and in China) to all of you!

May each and every one of you have a Happy Thanksgiving.

China attorneysIn China to Charge Three Australian Crown Resorts Executives The Wall Street Journal (Wayne Ma) reports that Chinese authorities will be pursuing criminal charges against at least three employees of Crown Resorts Ltd., an Australian gambling company. The article states that three Australians — among 18 people initially detained last month — remained in custody in Shanghai and …. [that one] of the Australians detained was Jason O’Connor, vice president of Crown Resorts’ international VIP operations. The status of the other 15 taken into custody is not clear.

As noted in the article by Peter Humphrey, who himself served time in a Chinese prison for alleged violations involving corporate investigations, “after someone has been charged, ‘the chances of getting them out have diminished by several times,’ said Mr. Humphrey, who maintains his innocence. ‘Whoever laid these charges now has a political stake in making them stick,’ he added.”

The kicker in all this actually comes from a quote by co-blogger Steve Dickinson in this Bloomberg article:

“In the old days, people would insist to me that the only risk was deportation. This is no longer the case,” said Steve Dickinson, a lawyer at Seattle-based Harris Moure, which produces the China Law Blog and has advised companies in the gaming sector. “Foreigners can expect to be treated exactly like Chinese nationals.”

And here’s the thing about the Crown case: the Chinese government had for some time been signaling its intentions:

Under Chinese law, casinos aren’t allowed to promote gambling in China. Organizing a group of more than 10 Chinese nationals to go to casinos overseas also is a crime.

Overseas casino operators sidestep that ban by marketing only their hotels and entertainment in public promotions.

The detainments appeared to be foreshadowed last year in comments made by Hua Jingfeng, deputy chief of China’s Ministry of Public Security.

Mr. Hua told reporters that his department was investigating a “series of cases” involving foreign casinos in China.

“Overseas, a few countries are treating our country as a big marketplace,” Mr. Hua said, adding that he was aware overseas operators were establishing offices in China with the goal of luring citizens abroad to gamble.

Eight months later, Chinese authorities arrested more than a dozen South Korean casino managers and a number of local agents allegedly for the practice.

Why should you not look away from this post if you are doing business in China? Because it is vitally important to you and to your company that you understand that China will arrest and imprison foreigners and that it has only become increasingly willing to do so.

In a post we wrote back in 2014, China’s Anti-Corruption Drive. What Next? we mused about China’s then nascent anti-corruption drive what it all might mean, and we noted the following:

  • China is serious about corruption and it is starting with the pharmaceutical industry because corruption is so entrenched there. China is going after both domestic and foreign companies, but we are just hearing more about the foreign companies. This is just part of China’s desire to reduce corruption because the Chinese people are really sick of it.
  • Nobody really knows where and when the Chinese government will strike next when it comes to corruption. We all just know that it is striking a lot more often than it used to and striking against a much more varied list of companies (the smaller foreign companies that have gotten hit have for the most part managed to stay out of the news).
  • If you are a foreign company doing business in China in an industry the government deems important or politically sensitive, you should be extra worried/cautious.

And here’s the latest rumor we are getting: China is going to start criminally pursuing those who earn income in China with  independent contractors in China and no company in China and who pay no employer or income taxes in China. For what this situation looks like, please check out my Forbes article, China’s Tax Authorities Want You (written before we started hearing of criminal implications).

So whatever you do, please don’t look away. Better yet, have a full-on audit done of your company to ensure there is nothing lurking there.

For more on the Crown Resorts case and the lessons to be learned from it for anyone doing business in China, check out Doing Something China Doesn’t Like? Don’t Go There and How To Avoid Getting “Detained” in China and Why Your Odds are Worse than you Think.

China manufacturing contractsIn China Product Development: Focus on Manufacturing Rights, I set out the ideal resolution of product manufacturing rights issues that arise in co-development projects in China. As I noted in that post, in our experience it is often difficult to convince the Chinese side to agree to that ideal option. So what do you do when the Chinese side refuses to agree? You have a number of options, including the following:

Option 1: License the underlying technology from the Chinese side. When the Chinese side takes the position that it will retain the rights to the underlying technology in your product, your next step is to try to negotiate a license to that technology. This kind of license is common around the world, and it can take many forms, including the following:

a. Negotiate a standard license for the underlying technology for which you will pay a license fee. You can pay this fee as a lump sum or as a per unit royalty for each item manufactured in a separate facility. In some settings the license payment is based on purchasing a certain number of units at a premium price. After that amount has been paid, the foreign party then has a license to manufacture elsewhere. This standard license approach is a very common procedure around the world, but it is seldom used in China. As Chinese manufacturers become more sophisticated about monetizing their technology, this type of agreement will become more common, and our China lawyers are already starting to see that happen.

b. Negotiate an agreement with your Chinese manufacturer side that allows you the freedom to manufacture the product in a different facility, but only if your Chinese manufacturer is unable to meet predetermined quantity, delivery date or price terms. Often this license will allow manufacturing in a different facility only for amounts in excess of a predetermined minimum. For example, the Chinese factory may produce 100,000 units per year at a set price and the foreign party is permitted to use a different facility only to manufacture anything in excess of 100,000. The flaw in this approach is that it assumes the Chinese side will be capable of manufacturing the first 100,000 units, both in terms of quantity and quality. Where this is not true, this leaves you as the foreign product developer hostage to the Chinese factory, which can be financially devastating.

Option 2: Walk away. It is surprising to me how many times foreign hardware entrepreneurs fail even to  consider the basic option of refusing to work with a Chinese company that will not cooperate on key manufacturing rights issues.

It is critical to understand what the Chinese side means when it states it will under no circumstances release the manufacturing/IP rights in a co-developed product. What the Chinese side means is: We own the product. We will manufacture the product and we will allow you to sell the product on our behalf in a foreign market. If you succeed, great. If you do not succeed, we will simply refuse to accept your future purchase orders. We will then either market the product ourselves or we will engage some other company to market the product. That “other company” will normally be an established player in the market, and not a mere start-up like you. In other words, you will be reduced to becoming essentially the Chinese company’s sales agent and you will be subject to being terminated even for that at any time. 

Most start ups are looking for new money. Consider how hard it is to raise new money when you are in the situation where you have no control over “your” product. Since the result will be an economic disaster, it is often best to simply walk away when it is clear that the Chinese side is trying to put you in an untenable situation.

Option 3: Turn the tables. Some foreign developers do not walk away because they feel they have no other option; they think they are forced to work with the Chinese manufacturer. Though this situation is dangerous, it can work so long as the foreign entrepreneur is willing to turn the tables and operate how a Chinese company would operate in the same situation.

In the turn the tables approach, the foreign developer basically “writes off” the co-developed product. The product is not treated as the foundation for the start up company. Instead, the co-developed product is treated as a research project that will provide the foundation for an entirely new product. For this new product, the foreign product developer will work to achieve control over the technology and the manufacturing rights. It may take several rounds of development, but the goal of the foreign developer is always to achieve complete product control, using the Chinese manufacturer as a test bed for developing a new technology.

Many foreign product developers are confident that they can pull off this reversal of roles. They tell me that they will not walk away because they have this plan. In my experience, it is quite difficult to turn the tables on Chinese manufacturers. Chinese manufacturers have been using this strategy themselves for many years and they usually can see what is happening in time to take early action to protect themselves. However, if well planned, this strategy can be successful. The key is in the planning. If the plan is not laid out clearly from the very start, there is very little chance of success.

China employment lawyerIn yesterday’s post, China Employee Terminations and The New Two Child Policy, I discussed how the laws vary in China regarding whether an employer can terminate an employee for having violated China’s family planning laws. In this post, I address whether an employee’s violating China’s family planning laws allows the employer to refuse to provide the extra protections normally provided employees during pregnancy, such as no overtime or an adjustment of workload?

As is nearly always the case with any China labor law issues, the answer varies by locale, but generally speaking, a pregnant/nursing employee who violates China’s family planning laws should be treated the same as other pregnant/nursing employees while on the job. However, other benefits after childbirth, such as paid maternity leave can generally be withheld from an employee who has violated the family planning laws, though this too varies by location.

I should emphasize how important it is not to try to remove an employee’s legal protections by having them sign a contract that purports to do so. A fairly recent case out of Shanghai (a fairly employer friendly city) makes this clear.

In this case, an employee entered into an employment contract with her Employer on her first day: March 1. This employee was required to fill out an employee form before she officially started. As she was not married at that time, she checked the box for “single” on the form. The Contract expressly provided that if any information provided by the employee was untrue, the employer would have the right to void the contract and unilaterally terminate the employee. The employer’s handbook contained similar provisions and also required its employees update the employer within 10 days if any personal information, such as marital status had changed. The Employee became pregnant a few days after her first day and started going to checkups but she never informed her employer about her pregnancy until October.

The Employee married in May and her employer approved her marriage leave. A couple of months before her expected due date, the employee provided her employer with a doctor’s note saying she would need to go on maternity leave because she would need to rest before her scheduled C-section. The employee requested paid maternity leave, but her employer immediately terminated her because she had “deceived” them by not providing accurate information about her personal situation. The employer then brought a labor arbitration claim against the employee seeking to declare her employment contract void. The employee filed counterclaims demanding her salary during her sick leave and maternity leave, as well as double statutory severance for unlawful termination and reinstatement of her position.

The employer lost on most of the claims and was ordered to pay the employee her salary during her sick days and during her maternity leave and also to pay for her social insurance until the last day of her extended maternity leave. The court acknowledged that the employee should have updated her employer on her marital/pregnancy status sooner, however, nothing she had done justified her unilateral termination. The labor arbitration committee did not discuss the employee’s claim for double statutory severance for unlawful termination and because the employee withdrew her claim for reinstatement of her position and did not argue for unlawful termination severance at the court level the court did not discuss those claims either.

The court stated in its first sentence of its decision that “employees’ legal interests are protected by law” and female workers “giving birth is a natural and legal right and must be accorded full protection.” Though this case was decided before China’s new two-child policy and though some of the legal aspects of this case have changed, what has not changed is that it is simply not possible to remove most worker protections via contract. Most importantly, what also has not changed is the importance that you as a China employer should know and follow all of the relevant laws and regulations and rules (national, regional, and local down to your specific district within your city) before terminating or even penalizing one of your employees.

China employment lawyerIn China’s new two-child era, couples are allowed (even encouraged) to have two kids, but no more, unless an exception applies.

Can an employer in China unilaterally terminate an employee who is having more than two kids or otherwise violates the relevant laws on family planning and population control? This is an easy question to answer regarding employees of state-owned enterprises and government agencies. Employees at such organizations are subject to more stringent regulations because they are government employees and they can be unilaterally terminated for having more than two children (still, the legality will depend on the local regulations).

The question that most concerns China employment lawyers and China employers alike is what can privately owned companies do in this situation. As is so often the case when it comes to China employment law, the answer(s) is localized and complicated. For example, Shenzhen generally prohibits employers from unilaterally terminating an employee for violating family planning laws, but it also gives its employers some leeway by allowing them to deal with this issue in their employment contracts, collective contracts and/or their employer rules and regulations. But since the basis for my statement regarding the rules in Shenzhen are based on seminar minutes from a Shenzhen Human Resources and Social Security Bureau meeting minute, the legal authority for even this in Shenzhen is somewhat unclear.

It is also important for any employer in China to understand that because female employees are a special class for whom Chinese laws provide extra protections, unilaterally terminating a pregnant employee is almost always going to be more difficult and problematic than it may first appear under the written laws and regulations. For this reason, when our employer-clients seek our counsel on unilaterally terminating a pregnant employee we nearly always seek out alternatives, including usually a mutual termination with an appropriate Chinese language settlement agreement. See China Employee Termination: Avoid These Mistakes.

A related question is whether an employer can put in its rules and regulations that violating relevant family planning laws warrants employee termination. As noted above, such a provision may hold water in Shenzhen, but not necessarily elsewhere in China. Many cities in China are of the view that because the employee who has violated China’s family planning laws will be or already is facing fines imposed by the authorities overseeing family planning and population, it would be too harsh to also allow the employee to be unilaterally terminated for the same thing, no matter what is in the employer’s rules and regulations and no matter how “flawless” the termination. Beijing used to split on this question, with some of its labor bureaus believing that employers may rely on their rules and regulations to fire an employee for violating China’s family planning laws, while others held the opposite position. Around the time of International Women’s Day in 2015, Beijing’s Second Intermediate Court made clear its position in a press conference: employers cannot unilaterally terminate employees for violating China’s family planning laws. An employer may discipline such an employee (but not terminate her), provided there is an applicable provision in the employee rules and regulations. In other words, if you have no such rules in place, you do not even get to discipline the employee. However, whether this Court pronouncement settles the issue even for Beijing is still unclear.

In a follow-up post, I will discuss what China employers can and cannot do regarding various other protections (overtime, workload adjustments, etc.) normally provided to pregnant employees, when one of their employees violates China’s family planning law.

China lawyersIn yesterday’s Quick Question Friday, China Law Answers, Part XXXV, I posed what is probably the single most common question our China lawyers get from our fellow lawyers: “What should we put in our dispute resolution provision in the contract we are drafting with a China company.” And then I very briefly explained how there is no one fits all answer and that the right dispute resolution clause should be determined based on a totality of the circumstances. I also promised to expound on that answer today, and so here goes, part I of how to draft the right dispute resolution clause for your particular situation.

The dispute resolution provision you put into your China contract may be the most important provision in the contract. If you put in a dispute resolution provision that makes sense, your Chinese company counter-party with whom you are contracting will be afraid to breach the contract. Conversely, if you put into the contract a dispute resolution provision that will not work, you are signaling to your Chinese company counter-party that it can breach its contract with you with impunity. Yes, it really is that important.

In fact, whenever I am asked to review a contract between a US company and a China company, the first provision I look at is the dispute resolution clause. Far too often when I am asked to review such a contract, it is by a new client who did not use one of the China attorneys at my law firm to draft the contract and I am now being asked to review the contract because something has gone wrong and the new client wants to know what it can do.  I review the dispute resolution clause first to see if there is even any point in determining the strength or the weakness of the US company’s claims against the Chinese company. If the contract calls for litigation in the United States, before a US Court and the Chinese company has no assets in the United States, the quality of the case just went way down.

China does not enforce US court judgments. It just doesn’t. Since China will not enforce any judgment that you receive from the US court, your winning in the US court will likely be meaningless.  Getting a US judgment against a Chinese company with assets only in China is of no use.  Getting a US judgment against a Chinese company that has assets in the United States or in some other country that will enforce a US judgment (Korea and Canada spring immediately to mind) might have some value. This means though that if you have an existing contract that requires disputes between you and your Chinese counter-party be resolved in a US court, you probably have a contract that does not work and you should be seriously considering trying to negotiate a new contract.

Way back in 2006, in Enforcing Foreign Judgments In China — Let’s Sue Twice, we wrote about how a typical phone call goes when someone calls us for help enforcing their US judgment in China:

Caller:  I have a two million dollar judgment against Chinese company X in China, can you help me enforce it?

Me:  Is it a default judgment here in the United States?

Caller:  Yes.

Me:  Chinese courts do not enforce United States’ judgments and they don’t give any credence whatsoever to United States default judgments. Did you discuss this possibility with your U.S. lawyer before you sued here in the United States?

Caller:  [long silence] …. Yes.  He told me getting a judgment here couldn’t hurt?

Me:  Did your lawyer charge you to get it?

Caller:  Yeah.  I had to pay him and I had to pay all sorts of people to get that company served in China.

Me:  Sorry.

So much of the time in your China contracts, it will make sense to draft a dispute resolution clause with your Chinese counter-party that calls for disputes to be resolved by a Chinese court (or sometimes by arbitration in China or outside of China).

In the next post in this series, I will discuss the pros and cons of using arbitration outside China (foreign aribitration) to resolve your contract disputes.

China Attorneys

Because 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.

One of the more common questions (by far) we receive from our fellow lawyers is something like the following:

I have just drafted a contract between my client and its China-based licensee. I am planning to use a AAA arbitration clause because I have heard that China enforces formal arbitrations. Does this make sense to you?

My answer (and that of the other China attorneys in my firm) is usually something like the following:

I have no idea what will make sense for your client on this particular contract because I have never seen this contract and I have no idea what your client’s goals are nor do I know anything about what is being licensed or about the Chinese company on the other side. Without all of these things (and more), there is no way that I can opine on this.

I then sit back and wait for the “fun part,” which comes maybe 40 percent of the time and looks something like this:

Right, but if I wanted to be safe and make sure that I am not getting my client into any major problems, would you agree that arbitration in an international contract is the way to go?

My typical response to this is to say that it is not clear to me whether you are seeking my views on international contracts in general or this one in particular but since I do not know enough to opine about this one in particular I will opine about international contracts in general and to that my answer is no.

In tomorrow’s post, I will explain why when contracting with a Chinese company it is so important to do the right thing on your dispute resolution provisions and why there is never one answer on what to choose. Most importantly, tomorrow’s post will set out some of the factors we frequently use in making this decision and it will also rail against those (and there are many) who just assume choosing arbitration is the “safe” or “default” choice.

China Trade Dress Law
Do you know the store? Is it Hong Kong or New York?

Close your eyes, and imagine that when you open them you have been magically transported to another country and you are inside a Starbucks. How do you know you’re in a Starbucks? Even if you’re not this guy, you could probably tell where you are without seeing the word “Starbucks” or the mermaid logo. Would you even know that you were in a different country? Probably not – and that’s exactly how Starbucks wants it. A Starbucks coffee shop has a certain look and feel, a “know it when you see it” gestalt that is easily and immediately identifiable.

The look and feel of products or services – including product packaging and design, the GUI of a website or software application, and the layout and design of a store – generally fall under the rubric of “trade dress.” In the United States, trade dress is considered a symbol or device under trademark law, and can be registered and enforced just like any other trademark. And you better believe Starbucks enforces its trade dress rights.

In China, trade dress is not well defined and not given specific protection as such. Conceptually, trade dress in China incorporates IP elements that don’t fit neatly under the rubric of trademark, copyright, or patent, and to the extent trade dress is protected in China, it is via China’s Anti-Unfair Competition Law (AUCL). However, insofar as it applies to trade dress, the AUCL is not particularly strong, only applies to “famous” products and services, and doesn’t have a mechanism for registration. In other words, you can only enforce trade dress rights by taking administrative or legal action, and if you don’t have a famous product or service you probably shouldn’t bother.

However, a couple recent judicial decisions in China provide a glimmer of hope. In 2015, Stihl, a leading manufacturer of power tools, was deemed to have trade dress protection for its distinctive orange-and-grey color scheme. (A Hangzhou machinery company had made exact copies of several Stihl chainsaws, including the color scheme but excluding the “Stihl” trademark.) And earlier this year, Activision Blizzard was awarded trade dress protection for the look and feel of World of Warcraft, including such elements as character names and designs, equipment icons, maps, and game interface. (An online Chinese game called Everyone WarCraft: War of Draenor had copied much of World of Warcraft’s look and feel.)

A draft amendment to the AUCL was published on February 25, 2016. Most of the commentary to date has focused on the changes that amendment would make to the antitrust and anti-monopoly language, but it also could expand the scope of what could be covered under trade dress. It appears that the trend in China is toward more trade dress protection.

Even with these positive steps, trade dress protection in China should be seen as complementary to the registrable forms of IP protection like trademarks, copyrights, and patents. You may not be able to register the layout of your China retail store, but you can register trademarks in China for color combinations (as Stihl eventually did) and character names and you can register copyrights for product labels, video game characters, icons, and maps and you can register design patents for the outward appearance of products.

Bottom Line: Trade dress protection exists in China, but only sort of. Relying on China trade dress protections is not advised. The way to protect your intellectual property in and from China is by registering trademarks, copyrights and patents there.

China lawyers
Document who owns what

I recently wrote a series of posts on product development in China, entitled, Hardware Co-Development in China: Do it Right. (Go here for Part 1, here for Part 2, here for part 3, and here for Part 4 of that series). That series resulted from my recent trip to the Hardware Valley in Shenzhen, during which time I was able to discuss our legal approach with foreign hardware developers on the ground in China and the various manufacturing consultants and mentors that help them.

If you read my four part series on developing hardware products in China, you can see that the product development situation is complex, particularly as it relates to who ends up with the related intellectual property as between the foreign developer and the Chinese manufacturer. A number of clients, readers and fellow lawyers have asked me to summarize our current understanding of to practically structure these product development relationships so the foreign company, not the Chinese manufacturer, ends up with the right to the developed product.

We have found that the key in the process is to focus on manufacturing rights, rather than on intellectual property rights, especially when the PRC or Taiwan factory presents the foreign product developer with an already prepared manufacturing agreement. Lawyers all over the world have become masters at writing complex and sophisticated intellectual property provisions for insertion in development and manufacturing agreements. Because these IP provisions are written to cover every possible situation, they tend to be written at such a high level of abstraction that they often have no real meaning on the ground in Asia. When a client asks me to review such a provision provided by a PRC or Taiwan factory or designer, my response is usually that the PRC/Taiwan party chose vague language intentionally so as avoid letting our client know that it plans to usurp our client’s IP or that the language clearly does not to benefit our client.

Our solution at this point is not to further refine already highly refined IP language. Instead, we advocate temporarily forgetting about IP rights altogether and focusing instead on the practical issue of manufacturing rights. At the end of the development process the Chinese factory and its foreign customer (our client) will be looking at a set of prototypes and the sole issue for the foreign party at that point is usually what can I do with those prototypes? If the answer to this question is not clearly resolved at the start of the development process, the answer will usually be that the foreign party can do nothing more with the prototype than what the Chinese factory will allow.

To avoid this result the foreign party should at the inception of the development process secure an agreement that includes the following:

  1. A clear statement of what will be done, who will do it, and when it will be done. This includes a clear description of the product to be designed and a clear statement of the work to be performed. Many product design projects in China fail at this stage. No one knows what is going on, and after a year or two of development, no progress is made on the prototype.
  2. A clear statement of the costs, allocation of costs and payment dates for the costs. Most important is a clear understanding of what will be provided by the Chinese manufacturer in return for your payments. This provision typically should address molds, tooling, software, design, working model.
  3. A provision making clear that if the design project fails, all of the tangible and intangible materials developed during the project should be transferred to the foreign customer. Nothing should be retained by the Chinese factory or designer.
  4. A provision stating that if the design project succeeds and prototypes are developed, you, the foreign customer, shall have the right to manufacture the product in any factory anywhere in the world. This is the key issue. The foreign party should at any time be able to determine what factory will manufacture the prototyped product. Normally, this will mean manufacturing it in the factory of the co-developer. But what if that factory cannot give you a satisfactory price, quantity, delivery date or quality? What if the Chinese factory seeks to raise prices on you six months later? For you to be able to maintain control over your product, you must have the right to move part or all of the manufacturing of your product to the facility of your choice, for any reason at all.

This issue of right to manufacture should be clearly understood by both sides before the parties start discussing the more abstract issues of intellectual property rights. The reason I say this is because every factory owner and every foreign party clearly understands the issue of manufacturing rights and if you negotiate for this at this basic and practical level, the real situation will be revealed in a way both parties can clearly understand. We have found that once the parties reach a clear agreement on manufacturing rights, the technical intellectual property provisions become relatively easy for our China lawyers to draft.

You must though seek to reach agreement with your China factory on manufacturing rights before product development even begins because if you wait until the product development process is complete, you will have relinquished all of your leverage. If you wait until the prototype is completed, the Chinese factory can say no to you having any manufacturing rights and then it can raise its manufacturing prices with near impunity.

This means you must complete your negotiations on the product manufacturing rights before the Chinese side has acquired all the power through its control of the final prototype. This means you must have a China appropriate contract making clear that you (not them) own the manufacturing rights. Without this document, there is a good chance the Chinese manufacturer will be able to stop your product from being made by any other factories in China or from leaving China if it is.

Bottom Line: When beginning the product development process in China it will often make sense for you to skip abstract discussions of intellectual property rights and just focus on the key practical issue both parties can understand: when the prototypes are finished, what can you do with those prototypes? Discuss this issue early on with your Chinese manufacturer.

In my next post, I will discuss what to do when your China manufacturer tells you that you cannot use any other company to manufacture “your” product.