Want to be able to terminate an China employee? Have the right tools.
Terminating a China employee? You need the right tools.

I am constantly writing about how China’s labor laws generally favor employees and how Chinese arbitrators and courts also favor employees. However, employers who do all the right things can prevail against their employees, or at least create enough of a chance for prevailing to greatly reduce the severance they need to pay their departing employee to get that employee to agree not to sue. China’s courts will side with employers that make termination decisions pursuant to a set of enforceable employer’s rules and regulations/employment contract.

Let’s take a look at a recent case (only a few months old) in Shanghai, with its facts simplified a bit for this post. The employee was hired to work as the business development department manager. The parties executed a written employment contract. The employer unilaterally terminated the employee in the beginning of 2016 because the employee had formed two companies that competed with the employer during the employee’s employment term. The employee had formed and was the shareholder and director in two companies with business scopes that overlapped with the business scope of the employer business.

Despite all this, the employee brought a labor arbitration claim against his former employer, alleging unlawful termination. The employer lost and was ordered to pay the employee double statutory severance. The employer then filed a lawsuit against the employee. The employee lost at trial and then lost again on appeal.

The employee put forth two main arguments: (1) he established his two companies before he received his employer’s rules and regulations so they should have no legal effect on him; (2) his companies were flagged as “abnormal” by the relevant authorities and therefore they are not in business, and therefore his companies never adversely affected his former employer. The Shanghai People’s Second Intermediate Court rejected both arguments.

The employer argued that the employer’s rules and regulations explicitly prohibited the employee from taking a position outside his work and from establishing companies in competition with the employer. Moreover, his employment contract expressly listed the employer’s rules and regulations as an exhibit to the contract. The employee did not dispute having signed the contract.

The court noted that an employment contract governs both parties’ rights and obligations and is binding on both parties and both parties should act in good faith in the course of the employment relationship. Though it was disputed as to whether the employee’s two companies were ever actually in business, this does not change that the employee did breach the employer’s rules and regulations by opening them at all. The employment contract also expressly prohibited the employee from taking any outside job. So even if the employee did not receive the employer’s rules and regulations before he formed the two companies, his failure to report his activities to his employer after he received the rules and regulations justified his employer in terminating him pursuant to the employee pursuant to the employment contract and the employer’s rules and regulations. The employee’s failure to alert his employer violated his duty of good faith to his employer and justified his termination. The primary takeaway from this case is that employers benefit from having enforceable rules and regulations to which they can cite to when disciplining or dismissing an employee.

Bottom line: One of the best grounds for terminating an employee without having to pay severance (or if you want to be safe, you pay a relatively low severance and you get your employee to sign a settlement agreement) is serious breach of employer’s rules and regulations. We regularly receive inquiries from foreign company employers who want to terminate their employees for misconduct, but have no enforceable rules and regulations. To quote Confucius, “to do a good job, one must first sharpen one’s tools.” To be able to terminate an employee for violating your rules and regulations, you need to have the right “tools”: an enforceable employment contract and enforceable rules and regulations.

 

 

China negotiationsWay back in 2012, my good friend Andrew Hupert wrote a great book on negotiating with Chinese companies: The Fragile Bridge. And for the last five years, whenever anyone asks me what book they should read to learn more about how to negotiate with Chinese companies I always recommend The Fragile Bridge. Earlier this week, someone to whom I made this recommendation emailed me with the following:

Thanks for recommending The Fragile Bridge to me. Took me quite a while to get started with it but once I did, I couldn’t put it down. Hupert clearly knows how to handle Chinese companies and I appreciated how how he does not drone on for an extra 100 pages, as so many other others who write about China feel compelled to do. Any particular reason why you never recommended it on your blog?

Whoops. no particular reason other than oversight.

Here’s the thing, and somewhat in my defense: I hate writing book reviews. My father was an English professor and so I learned at an early age that good book reviews must consist of more than “loved it, buy it and you will too.” And yet writing much beyond that is a ton of work. Maybe worst of all, it requires reading a book slowly and taking notes, which contrasts with my style, which is to read books as quickly as possible with no note taking whatsoever.

When I tell people how tough I find writing book reviews, they always wonder why it would be any tougher than just writing a blog post. Most of my blog posts come fast to me because they mostly consist of my putting in writing what I tell clients as part of my work, or what I hear other China lawyers in my firm tell clients as part of their work. Or else it’s just me pulling from my own emails to clients or, better yet and easier still, my pulling emails from the other China attorneys in my firm to clients.

But writing a book review is real work for which there is no bill at the end. That’s what I call tough.

But I do agree that I should have reviewed Fragile Bridge a long time ago, so here goes.

Great book. Loved it. Uber-practical. If you will be negotiating with a Chinese company, you must buy it. Now!

But wait, there’s more. Amazon describes the book as follows, and I swear to you that its description is 100% spot on, and here it is;

Written by an American for Westerners negotiating in China, “The Fragile Bridge” dispenses with politically correct euphemisms and ivory tower pseudo-psychology. The Chinese want your technology, intellectual property and product designs. You want their markets, resources and labor. Knowing which 1,500 year-old philosopher uttered what esoteric phrase won’t help you safeguard your assets or keep your JV operating, but learning from the lessons of dozens of successful Westerners who have survived the China challenge just might. Andrew Hupert’s even-handed analysis uncovers the sources of conflict in Western-Sino negotiation and anticipates the trajectory that business disputes travel. “The Fragile Bridge” offers readers practical, insightful advice for avoiding, containing and managing China business conflicts of all shapes and sizes. Case studies and examples illustrate each observation. The book ends with a list of highly practical best practices that are appropriate for newcomers and “Old China Hands” alike.

How can you not want to read a book described as per the above? I particularly love the line about how “the Chinese want your technology, intellectual property and product designs,” because I’ve been known to start one of my China speeches with something like the following:

Big companies in China want to steal your IP. Small companies in China want to steal your IP. Government-owned companies want to steal it. Privately held companies want to steal it. And even that company that is run by someone who invited you to his daughter’s wedding—that company also wants to steal your IP. This is not a reason not to do business with Chinese companies, but it is a reason for you to be sure to do business the right way with those companies.

I gotta love an author who thinks like me.

Anyway, just buy the book.

 

China WFOE A while back (I am being intentionally vague here to avoid identifying anyone) a U.S. client company contacted me about shutting down its China WFOE and/or terminating all of its roughly 20 China employees in one fell swoop. The U.S. company had discovered rampant corruption among its employees and its CEO wanted all of this to be done “by tomorrow.” I am not kidding!

My response (modified to hide any identifiers and ` into one email) was as follows, with the client identified below as “Company A.”

I spoke with Grace Yang (our lead China employment lawyer) and with Steve Dickinson (our lead China corporate lawyer) and both agree that there is no way we can provide you with anything even approaching sound advice by tomorrow.

You essentially have two choices. One, you slink away in the middle of the night and neither Company A nor anyone who China might ever identify as having been associated with Company A ever goes to China again and Company A never conducts any business with China again. If (as I pretty much know will be the case) this does not appeal to you, then you must provide prior notice to the government because what you are proposing to do almost certainly constitutes what China calls a “mass layoff.” We will need to confirm with the authorities that such notice will be required because the definition of mass layoff varies depending on the local labor bureau. But we are virtually certain it will be.

Once we know exactly the layoff situation with which we are dealing, we can work with you to figure out the best, the fastest, and the cheapest way to accomplish it. If you have any employees who are pregnant or any employees for whom this will present a significant financial hardship, this will get even more complicated.

In addition to the employee issues, you also will need to work with the government in shutting down the WFOE itself and that can be an even longer and more drawn out process than dealing with the employment issues. We typically bring in accountants to assist with WFOE closures because taxes are so central to this. We have worked with a couple of very good accounting firms in ___________[Chinese city] and we would want to bring one of them in for this closure. This is going to take a substantial amount of legal work on our part, gathering up the facts, researching the law, and meeting with government officials.

What I can tell you at this point is that how we handle this will very much depend on the facts. It will depend on the size of the WFOE (my client contact did not even know how many employees the company had in its China WFOE]. The reason for the layoff. The types of employees you have: some may need to be differently than others. The location. The economy in your location. The labor bureau office. Your company’s history. Your company’s plans for the future, including not just China but other countries. I could go on and on and I’m sure Grace and Steve can and would add many more things to this list once we get going on this. We have seen these sorts of terminations/shutdowns done right and we have seen these terminations/shutdowns done wrong and usually when they are done wrong really bad things happen, like people being held hostage in China or seized by the government when they go over there a few years later. When they are done right, they take a lot of thought and a lot of varied expertise and, most importantly, a lot of time.

If what you are proposing is a mass layoff — and we are virtually certain it is — there are certain procedures that must be followed, and those procedures vary by district, by city and by province. If it is a mass layoff, almost everything will likely need to be made public and the language used in the public notice thus becomes absolutely critical. The last thing you want is for your terminations to become this week’s big issue for labor activists. We will need to meet with the employee/union representatives or all of the employees to discuss severance. What can go wrong there? Well, one of the last times I was in Beijing, the talk of the town was an investment banker who went to meet with employees in a situation not all dissimilar to this, but without a plan. He was literally beaten to death. That’s obviously a rarity, but it does show the need to have a well thought out plan in place before doing anything.

The labor authorities will get involved and they have tremendous power to correct anything they think wrong with the WFOE’s mass layoff proposal. And the last thing you want to do is start out too harsh and thus anger them from the get-go. On the flip side, if we can win over the local labor authorities with a good plan, we can likely get them to assist in the whole process.

The above is mostly just the labor issues. Closing down the WFOE will have its own issues, mostly relating to first clearing up the labor issues, and any debt and tax issues. The tax issues tend to be worst of all because once a company starts closing, taxes start coming out of the woodwork. That is why we also will almost certainly want to bring in a high level yet local tax accountant. Oh and employees almost always file a claim against the WFOE regardless of how good a severance package they get; they nearly always think they deserve more. Which is why it will almost certainly be worth it for you to pay each of them enough to get each and every one of them to sign a settlement agreement in addition to everything else. I understand why you do not want to pay most of your employees anything right now, but it will probably end up making financial sense to do so.

Our China lawyers continued working with this company on a strategy and as time went on, their anger subsided and they chose not to shut down or layoff all of their China employees. But for anyone out there thinking of shutting down their WFOE or laying off all or nearly all of your China employees and needing some ultra-quick advice, the above should do, with the usual proviso that China’s laws on this sort of thing are always changing and always hyper-local.

China trade casesPresident Trump’s promises of tougher enforcement of U.S. trade laws has triggered the filing of an unprecedented wave of new antidumping (AD) and countervailing duty (CVD) petitions in the past few months. The U.S. already has many 397 AD and CVD orders in place, going back as far as 1977.  These orders cover 157 different products imported from 43 different countries. Most of these AD/CVD orders (by far) are on Chinese products, ranging from aluminum extrusions to xanthan gum. But just how effective are these AD/CVD orders? To what extent do these AD/CVD orders help certain domestic United States industries, but also harm other domestic industries? What kind of unintended consequences result from these cases?

To answer these questions, I look at one of the older AD orders: fresh garlic from China, which has been subject to AD duties since 1994. One reason why this order has lasted so long is because the domestic U.S. garlic industry has been able to show it would be vulnerable to material injury if the AD order on Chinese garlic were revoked. Gilroy, California may call itself the “Garlic Capital of the World,” but it is China that produces around  75 percent of the world’s garlic. China produces approximately 20 million tons of garlic a year as compared to the United States, produces around 175,000 tons. This disproportionality has allowed U.S. garlic producers to successfully claim they would be obliterated by a flood of cheap Chinese garlic were the AD order ever to be removed.

The vast majority of U.S. fresh garlic is grown in central California, but growing garlic there is getting tougher because of a tightening supply of land, labor, and water there. California garlic acreage planted is down significantly from 2000, and recent US garlic crops have been affected by white rot, a soil disease. Harvesting and packaging fresh garlic requires manual labor which has been hard to find, and likely will get even harder under Trump’s anti-immigration policies. California garlic growers face fewer available workers and increasing labor costs, as fewer people want to work on farms.  And as strip malls and suburbs creep towards farmland, property values are rising, making it even harder to find affordable housing for farmworkers. Garlic has also suffered from drought conditions in Central California for five years running and competition for scarce water resources has jacked up water costs for garlic growers.

The U.S. consumes about 260,000 tons of fresh garlic annually. After taking out the U.S. garlic used to make dehydrated garlic or as seed bulbs for the next garlic crop, U.S. garlic producers can now satisfy only about 30-40% of U.S. annual demand for fresh garlic. So, some imports are needed in the US market. Can AD/CVD laws effectively screen out unfairly traded garlic, while allowing in only the fairly traded garlic to fill the demand gap?

In the first few years after the AD order, Chinese garlic imports were completely shut out and U.S. garlic prices initially stabilized and then steadily increased. But by the mid 2000s, the US market price for garlic had risen so high that Chinese garlic could show they were selling at non-dumped prices even after absorbing initial AD duty deposits at 376%.

Between 2002 and 2007, the Department of Commerce (DOC) calculated zero or very low dumping margins for about a dozen Chinese garlic exporters. Not surprisingly, the volume of Chinese garlic imports into the United States increased, hitting about 72,000 tons in 2007. Since 2008, however, no Chinese garlic exporters have gotten any low AD margins calculated by DOC. More importantly, DOC has steadily knocked out Chinese companies that previously had low dumping margins, either by calculating higher updated margins in these later reviews or by applying the PRC-wide rate of 376% (or $4.71 /kg) because the responses from the Chinese garlic companies were deemed inadequate.

Out of all those Chinese companies that previously received a zero or very low AD margin, only one company, Zhengzhou Harmoni Spice (and their US affiliate, Harmoni International Spice), has been able to maintain an exemption from AD duties. This is because Harmoni worked out a deal with the California garlic growers (Petitioners) whereby Harmoni agreed to supply Chinese garlic to the Petitioners in exchange for the Petitioners agreeing not to request the DOC conduct another administrative review for Harmoni, which could result in Harmoni losing its zero dumping margin.  Some disapprove of such arrangements as an inappropriate gaming of the system that allows the domestic industry to manipulate the trade laws to its own benefit. But others view these as reasonable settlements that allow both sides to benefit in some way from the DOC not conducting a review.

In this garlic case, Harmoni clearly benefits as the sole Chinese garlic exporter with full access to the US market because it does not have to pay any extra AD duty costs or deal with burdensome DOC reviews. Petitioners also benefit by getting access to lower cost Chinese garlic they can use to supplement their own production and improve their overall profitability. Petitioners saw Harmoni as a “good” Chinese garlic exporter who would act responsibly in the market and not drive garlic market prices down, unlike all the other “bad” Chinese garlic exporters. Since 2004, Petitioners thus have not included Harmoni in their annual review requests that usually target all the other Chinese garlic exporters. Under US trade laws, DOC annual review requests can be filed by domestic producers, US importers for their own Chinese suppliers, and Chinese suppliers only for themselves; Chinese suppliers cannot request reviews for other Chinese suppliers.

The AD duties imposed on garilc increase costs that ultimately are borne by the consumer. But when fresh garlic costs are such a tiny part of your fettuccine alfredo, consumers are willing to absorb or are blissfully ignorant of those extra AD duties that inflate the price of garlic and the garlic wars are mostly being fought outside the public eye.

However, the cozy arrangement between Harmoni and Petitioners is now at risk of falling apart, depending on DOC’s upcoming final decision in the latest garlic administrative review. The other Chinese garlic companies, unhappy at being excluded from Harmoni’s arrangement with Petitioners, found a couple of New Mexico garlic growers to serve as “domestic producers” who last year filed requests that DOC conduct a review of Harmoni. Petitioners and Harmoni immediately pointed out that these New Mexico garlic farmers did not have standing to file the review request because they were not really domestic producers like the large scale commercial garlic farms run by Petitioners that account for about 80% of US garlic production. DOC disagreed and has accepted the New Mexico growers’ review requests and initiated a review for Harmoni. In December 2009, DOC issued a preliminary determination noting that Harmoni had not responded to the Department’s questionnaires and would receive the PRC-wide rate.

Harmoni and Petitioners, however, are still arguing that the review for Harmoni should still be terminated because the review request filed by the New Mexico growers was fraudulent and cannot be a valid basis for a DOC review. DOC has received numerous filings with sordid details of how the Chinese garlic growers and their US attorney planned to use the New Mexico growers just to undermine Harmoni’s arrangement with Petitioners. Late in this review proceeding, one of the two New Mexico garlic growers withdrew his support of the original Harmoni review request once it realized it was just being used as a pawn by the Chinese garlic growers. Harmoni has also filed a federal racketeering action that is still pending against the Chinese garlic companies and their US attorney for conspiring to defraud the U.S. government by filing false documents with DOC.

We will soon find out in DOC’s upcoming final determination for this garlic review whether DOC will accept or reject the New Mexico garlic grower’s review request and thus whether Harmoni’s arrangement with Petitioners will collapse or continue. But the fact that DOC has even preliminarily accepted this New Mexico review request highlights how DOC’s administration of the AD/CVD laws is so unpredictable that even the domestic industry cannot count on how these cases will turn out. DOC’s acceptance of the New Mexico garlic growers’ review request for Harmoni is particularly surprising because the Trump administration has been so unabashedly protectionist and DOC claims to administer the AD/CVD laws to protect the domestic industry from unfair trade.

The AD duties on Chinese garlic thus far have significantly restricted Chinese garlic in the U.S. market. In part because of the high AD duties, US garlic prices are among the highest in the world. Petitioners have been able to find a “fair” Chinese garlic company to help supply them with lower cost Chinese garlic, while still blocking all other “unfair” Chinese garlic companies. And yet, this arrangement that has benefited the domestic industry may come undone if DOC continues to accept the Chinese/New Mexico review request of Harmoni. Given the difficulties unrelated to Chinese garlic (rising land, labor, and water costs), the last thing the “real” US garlic producers need is an unfavorable decision from DOC that will shut down Petitioners’ access to “fair” Chinese garlic and open the door to “unfair” Chinese garlic returning to the U.S. market. DOC’s handling of this garlic review request issue demonstrates the US AD/CVD laws are blunt tools that are inconsistently applied by DOC and often result in unexpected and unintended consequences that do not help the domestic industry.

China employment law audit
Salary reductions in China

Can an employer in China unilaterally reduce the salary of one or more of its employees? Like so much having to do with China employment law, it depends.

Because labor remuneration is an often-litigated issue in China, employers should be very careful when reducing an employee’s salary and should take that action only when prepared to defend it before an arbitrator or a judge. As with China-based employee terminations, the best way to proceed and avoid employment disputes will usually be to do it via a mutual agreement (in Chinese) structured as an amendment to the existing employment contract. If you as the employer can get your employee to agree in writing to a salary reduction, that will both minimize your risk of later being sued for reducing your employee’s pay and it will increase your chances of prevailing should such a lawsuit occur anyway.

The tricky question though is whether an employer can reduce an employee’s salary without that employee‘s prior written consent. It is possible, but how you can do it will depend on the local employment laws and even to a certain extent on the local employment bureau. But even if allowed where you are, to maintain its legality, you must do a number of things (and document them) to make this work. In the real world, very few employers take the time and effort to do these things and those who don’t virtually all lost in labor disputes.

China’s Labor Contract Law does not explicitly give an employer the right to unilaterally reduce an employee’s wages because the employee is not competent at his or her job. The Labor Contract Law instead speaks to employer’s being allowed to unilaterally adjust an incompetent employee’s position, provided the employer meets all local requirements in making such adjustment. The Labor Contract Law also calls for the employer to provide 30 days’ written notice or an additional month’s salary in lieu of notice, if the employer can prove the employee is incompetent and remains so after training or assignment to another position. The employer may also reduce an employee’s salary in response to an employee’s breach of the employer’s rules and regulations.

The below are a few of the things employers typically (I say typically because these things vary depending on locale) must do for its unilateral salary decision to hold:

First, the employer needs to make sure its employment contract gives it the right to adjust an employee’s position and remuneration. Make sure the employment contract is fully executed by both parties. With China cracking down on employers lately (particularly foreign employers) our China employment lawyers have been doing a ton of employment audits and we are stunned by how many times we are seeing employment contracts signed only by the employee, signed only by the employer, or never signed by either party. Get your employment contracts signed by both parties and retain copies of those signed employment contracts in a safe and accessible place!

The employer then needs to ensure that its Rules and Regulations set forth its salary reduction policies. Forget about unilaterally reducing one of your employee’s salaries if you do not have a China-centric set of employer rules and regulations. And just as our employer audits are revealing a ton of foreign companies that do not have their employment contracts in good order, many do not have their Rules and Regulations in good order either. Some companies either did not know which was their current version or could not find their current version. And far too many had no written proof of ever having given their Rules and Regulations to their employees. Even with your salary reduction policies in writing, if you never obtained the employee’s written acknowledgment of having received a copy of such a policy, you will likely have a hard time getting a Chinese court or arbitrator to allow that to provide the authority for your reducing a salary.

But if you do have a proper set of Rules and Regulations that gives you the right to reduce the employee’s pay for violations of the Rules and Regulations and you can prove employee did in fact violate your Rules and Regulations, you may be able to reduce the employee’s pay on that basis. For this to work (and even then only in some locales), your Rules and Regulations must clearly specify the Rules and Regulations breach that will lead to a salary reduction and, as I wrote before, such provisions in your Rules and Regulations must be reasonable and not violate any Chinese laws.

If you as employer can get past all of the above hurdles, you next need records proving why the employee deserves a salary reduction. Something like written performance evaluations are usually best, and if signed as received by your employee, all the better. Make sure though that your performance evaluations are in Chinese or have been translated into Chinese; do not wait until your employee brings a legal action against you before you put this into Chinese as that will not be viewed as a contemporaneous document and it may be rejected entirely by the court or at least viewed with much less credibility.

Even if you satisfy all of the above requirements you still have another one: reasonableness. Was the adjustment you made for this particular employee reasonable. For example, is the new position suitable for the employee? Is the reduced pay appropriate for the adjusted position? Does it meet local minimum wage standards? Keep in mind the local differences: e.g., what is considered reasonable in Dalian may not be deemed reasonable in Beijing.

Finally, when you notify your employee of your salary reduction decision, you typically will need to provide him or her with an explanation for your doing so, so the employee can understand what led to your adjustment decision. Again, doing so in a writing in Chinese and getting that writing signed by your employee will almost always be the best way to do this.

Reducing a China employee’s salary is like pretty much everything else employment law related in China: it’s local and it’s not so simple, but done right, it’s possible.

Eight Reasons to File Your China Trademark
Eight Reasons to File Your China Trademark

Spring is coming to an end, but it’s not too late to conduct a little spring cleaning. First on the list: get your IP in order and register your trademarks in China. The following are 8 reasons to do so.

1. Because you are having branded goods manufactured in China, and don’t want them seized for trademark infringement. China is a first-to-file jurisdiction for trademarks and this means that if you don’t register your trademark, someone else could and probably will. Trademark squatters with particularly bad intent will register the trademarks of foreign companies manufacturing goods in China, and then hold those companies for ransom by threatening to seize their goods for trademark infringement. Export-only manufacturing in China generally constitutes infringing trademark use and so even if you are just manufacturing your product in China for sale elsewhere, failing to register your trademark used on that product puts you at great risk of losing your brand name or your logo to someone else in China and not being able to continue having your product made in China. Why expose yourself to that kind of risk?

2. Because you want to take down infringing listings on Chinese e-commerce sites. If you only have a trademark registration in the US or EU or some other jurisdiction outside China, you should be able to submit takedown requests to foreign-facing sites like Alibaba. But to remove listings from domestic Chinese e-commerce sites like Taobao and 1688.com you almost always need a Chinese trademark registration. Many other e-commerce or social networking sites require a Chinese trademark registration and every site will take action more quickly with one. Do you really want to spend your time arguing with DHgate’s customer service representatives? Do you really want to take the risk of having someone selling products with your name on them all around the world (or even just in China)?

3. Because you want to enter into a licensing agreement with a Chinese distributor. If you are going to license your products to a Chinese distributor and those products will be sold in China under the same brand name, then you need to own that brand name in China. You can’t license something you don’t own. A good Chinese distributor will insist that you register the trademark first; a less experienced (or shady) distributor might register your trademark “on your behalf” without telling you.

4. Because you want to sell goods in China. This is an absolute no-brainer. If you are selling branded products in China without having registered a trademark, there is a near 100% chance someone else will register your trademark in China and then come after you for trademark infringement. China does not recognize common-law trademarks and only has minimal recognition for “famous” marks. Just register your trademarks. And register the Chinese-language version of your trademarks, too.

5. Because you want to have counterfeit goods seized by Chinese Customs. With few exceptions, a foreign trademark has no relevance in China. It certainly means nothing to Chinese Customs. Would U.S. Customs and Border Patrol seize goods based on a Chinese trademark registration? Not a chance. And the only way to have Chinese Customs seize infringing goods is to first have a Chinese trademark registration, and then register that trademark again with Chinese customs.

6. Because you want to file a lawsuit in China against notorious counterfeiters. This seems obvious but is sometimes overlooked. You do not have any trademark rights in China unless you have registered your trademark in China. If you attempt to file a lawsuit in China for trademark infringement without actually owning the trademark in China that is allegedly being infringed, you will be laughed out of court. You would be surprised (or maybe you wouldn’t) how often our China IP lawyers are asked to sue a Chinese company for trademark infringement, only to discover that the company that engaged us has no China trademark and hence no basis for a claim of infringement.

7. Because even though you’re not selling goods in China, you might want to someday. It’s no mystery that China is the biggest market in the world, with monstrous buying power and a rapidly growing consumer class. It’s the rare company that can say it is categorically uninterested in selling to China for the foreseeable future. Currently it takes at least a year from the trademark application date to the registration date, and that assumes everything goes smoothly. Having a trademark registration in hand will make it that much easier for you to enter the Chinese market.

8. Because you want to make your company a more attractive buyout target. This goes hand in hand with the above reason. The annals of history are rife with tales of companies who found out too late that a trademark squatter had already registered their trademark in China. Don’t be that company. A company that has its IP all zipped up will always be more attractive as a buyout target. We have represented many a smart company that registers trademarks in China for no other reason than to increase its value to investors.

China complianceThe below post was written by Richard Bistrong, who recently returned from a long China trip where he met with all sorts of companies to assist them in their compliance efforts. Richard is CEO of Front-Line Anti-Bribery LLC  and a contributing editor of the FCPA Blog (a truly great blog, BTW). In 2010 he pleaded guilty to a conspiracy to violate the FCPA and served fourteen-and-a-half months at a U.S. federal prison camp. He now consults, writes and speaks about compliance issues. He was named to Compliance Week’s list of Top Minds in 2017 and was one of Ethisphere’s 100 Most Influential in Business Ethics in 2015. 

 

In today’s compliance environment, though we see a robust debate on what the new US administration might mean for anti-bribery compliance, the new ISO standard, and the recent DOJ “Evaluation of Corporate Compliance Programs” memo, those weren’t on anyone’s “what keeps me up at night” moments during my recent visits to  China. Yes, those are all meaningful topics for the field of practitioners, but from conversations at graceful Buddhist restaurants (with thanks to my hosts for indulging my vegan preferences) to live engagements and panels, much of the focus was on the “what happens when local customs conflict with the rules” dilemma. And that’s not to say that there’s an inherent conflict in China between ethical business practices and commercial success, but in an emerging market environment, with a young, dynamic and engaged workforce, the challenge is daunting, and not to be ignored.

The Importance of Defining Success. Compliance programs in China, like anywhere else, address the importance of lawful and ethical conduct, but during my visits, I saw a profound focus around “how to execute on both values and objectives,” in an environment where people are extremely focused on success, and the rewards of success. This desire to succeed manifests itself in a way that’s much different in an emerging economy than in a developed one. Employment with western based brands are coveted jobs, and commercial teams are anxious to demonstrate their ability to execute on financial objectives – in other words, to succeed. But that goal driven model often widens what’s a cultural and operational disconnect between the support functions at HQ and those forward based teams which are deployed in less supervised locales. And you can’t bridge those gaps with compliance paperwork and contracts.

Servant Leadership. One executive’s initiative was to call on mid-level leadership to be “servant leaders.” That really captured my attention, as he empowered his executive teams to push power down into the organization instead of up. As defined in The Center for Servant Leadership, a “servant-leader focuses primarily on the growth and well-being of people and the communities to which they belong.” Though traditional leadership generally involves the accumulation and exercise of power by one at the “top of the pyramid,” servant leadership is different. “The servant-leader shares power, puts the needs of others first and helps people develop and perform as highly as possible.” Yet another reminder as to why it’s so exciting to be back in the field — these are the business practices that one can only learn via immersion, and you don’t get that from the home office.

As to some more of the challenges, yes, anti-corruption was a big part of it, but not the only part. In China, corruption can intersect a work-force in both directions, as bribe payers as well as receivers. Commercial personnel who are responsible for dealer, intermediary and distributor networks might be subjected to requests for bribes, passed through those third parties to government officials — a set-up that’s familiar. But in China, employees are also exposed to the receiving side of corruption, as dealers might want to curry favor for discounts, product allocations or marketing allowances through corrupt offers.

In an environment based on relationships and hierarchy, that’s a complexity that might be hard to appreciate unless you are in front of it. It’s much more than anti-corruption compliance; it’s about ethical conduct in a broader sense, on hours and off. And those offers don’t come, or they don’t start, with brown bags of cash or numbered off-shore accounts. A dealer offering his beach flat for a holiday weekend to an employee might seem innocent enough, until a situation arises where that dealer might need a special allowance or discount. It’s a peril that often hides under the radar of friendship and association.  It’s part of what’s called the “dangerous charm” of third parties. After all, who wants to say no to a friend?

That’s just part of how I engaged in a discussion where there was an appreciation and focus on how to develop a commercial workforce free of conflict of interest, and how to inspire commercial leaders to embrace their roles as brand ambassadors. And those efforts were backed up, including by my own experience, with a “you can’t hide bad conduct behind your third parties,” and “what you don’t know can hurt all of us.” We spent a lot of time sharing with the workforce how they have an obligation to know the values and integrity of the people they do business with, and not to switch their ethical radar “off” after the third-party vetting process. In China, with state investment and divestment in industry and commercial entities, risk can quickly change over the life of a relationship.

In sum, those are just a few of the elements to which I was honored to engage. Having spent the better part of ten years living and working overseas 250 days a year, this was my first visit to mainland China. It left me wanting more, to return, and to read more about China’s role in today’s global economy along with its internal struggles as to how that gets implemented. China is experiencing what I heard called the “new normal,” where the period of exponential growth is slowing down, creating yet new challenges for commercial teams to succeed in a tightening marketplace. It’s a fascinating place, I found it personally contagious, and felt privileged to play some role in how to engage and inspire China’s commercial and compliance leaders to work together as each other’s ambassadors.

China hostage situationsWe used to write frequently about Westerners being held hostage in China over debts and over layoffs. Then we pretty much stopped.

We stopped because these posts always seemed to anger someone. Actually many someones. And they did so without really pleasing anyone.

But I am getting the strong feeling that the number of hostage situations involving Westerners is increasing at the same time the Chinese government and its police (both national and local) are more concerned with maintaining harmony among its own citizenry than about one foreigner being held in a mediocre hotel room. Getting a Chinese company paid on a debt will do more to advance social harmony than busting in and freeing a sole foreigner.

So why am I writing about it now? I can only very vaguely explain, but let’s just say that I am aware of a foreign company that had one of its employees seized in China over an alleged debt and it was anything but pretty.

But what I can tell you — what I will scream to you — is that HOSTAGE TAKING in China is real. Most importantly, I can tell you the advice my firm’s China lawyers give to our clients laying off workers in China or closing a facility in China or in a financial dispute with a company in China is — if possible — to stay outside China when negotiating resolution of these issues and to heed the following:

  • If you are in a financial dispute with a Chinese company, the best thing to do is not go to China at all. if you have to go or if you truly believe there is little risk, at least take precautions.
  • If you must go to China, think about using a bodyguard or two and think very carefully about where you stay and where you go. Most importantly, be careful with whom you meet. If you owe money to a company in Xiamen, meet with them in a hotel lobby in Shanghai or Beijing and not in their conference room in Xiamen.
  • Consider preemptively suing the Chinese company that claims your company owes it money. This allows you to plausibly claim that you (or your employee) have been seized not because your company owes a debt, but out of retaliation for having sued someone. If you are going to sue, carry proof of your lawsuit with you at all times while you are in China. This shifting of reasons can be very powerful when seeking police help.
  • Do not believe sending someone who is not a company owner to China will make any difference.

Hostage situations in China are rare, but not as rare as most believe. In the end, you are the one who knows the situation and the Chinese company(s) with which you are dealing, so you are the one who must make the decisions on whether to go or not. All I am saying is to at least be mindful of the risks.

 

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

One of the questions we often get is why we act as though there is no corruption in China. This question is often followed by a statement along the lines of the following:

My friend who has been in China 38 years tells me that China is the most corrupt country in the world and that no contract is worth the paper it’s printed on. Is this true?

No Virginia, it’s not true. Transparency International’s Corruption Perceptions Index, widely considered to be the most accurate measure of worldwide corruption, ranks China at 79 out of 176, putting China squarely in the top half of all countries worldwide in terms of a lack of corruption. Perhaps more importantly, the World Bank ranks China at number 5 in its measure of enforcing contracts!

 

China trademark lawyersA number of Chinese trademark law firms have of late been trying to drum up American clients on China trademark matters. I say this because our own China trademark lawyers have been getting a steady stream of emails from U.S. lawyers and companies contacted by these Chinese trademark law firms. The Chinese law firms are writing to US lawyers and companies to alert them of trademark filings in China of the same trademarks owned by the company in the United States. These emails from the Chinese trademark attorneys to U.S. trademark attorneys usually go as follows:

We, _________ are a specialized Chinese IP law firm. Our trademark research team took note of the following marks from a recent issue of the Chinese Trademark Gazette published on May 6, 2017, open to oppositions before August 6, 2017, Beijing time, NOT extendable. Particulars of the marks are listed below for your reference.

Gazette Clipping

IMAGE

Provisional Approval No.

2——-

Class

7

Goods

Capstans; Pulleys; Derricks, etc.

Application Date

June 14, 2016

Applicant

___________ Outdoor Supplies Co., Ltd.

Address of Applicant

________City, ________ Province, China

For your information, we, ______ IP, are a Chinese IP law firm and member of various international organizations, including INTA, ____, ____, ____. The majority of our clients are based in China, which enables us to regularly send business to our foreign associates. We will be more than pleased to establish reciprocal relationship with your esteemed firm.

We look forward to your reply. If you are NOT interested in our reporting emails of this type, please feel free to let us know via return and we will refrain from bothering you any more, your understanding is highly appreciated.

The U.S. trademark lawyers — oftentimes not knowing whether the email they just received is a scam or not — then write us asking us what is going on and what their client should do. Our response is usually something like the following:

  1. Yes, something is actually happening with the marks in China. On June 14, 2016, the Chinese company _______ Outdoor Supplies Co., Ltd. filed applications for the stylized “_________” mark in Classe 7. I have attached copies of the relevant trademark information. Though it’s in Chinese you can see that the stylized mark is an exact copy of your client’s. The marks have been approved by the CTMO examiners and were published in the May 3, 2017 edition of the Trademark Gazette. If three months pass and no one files an opposition, both marks will proceed to registration.
  2. Your client could indeed file an opposition to one or both marks. But unless the Chinese company has or had a business relationship with your client, the odds of a successful opposition are low. China is a first-to-file jurisdiction and the grounds for a bad-faith filing are limited. It is unlikely your client’s mark would be considered “well-known” enough to convince the CTMO that these filings were in bad faith. The Supreme People’s Court did issue some guidance suggesting China would be taking a harder line on trademark squatters, but we haven’t seen much difference in the way trademarks are examined. Note though that these oppositions are relatively inexpensive.

It does not appear the Chinese company is a trademark squatter per se; they only have two other trademarks (both registered) in their name. My guess is they actually intend to use your client’s mark in China to market or sell their own goods.

Your client has the following options at this point:

  1. File an opposition to one or both of the cited marks. If these marks are important to your client and they understand the low odds of success, they probably should do this, in large part because the costs of their doing so are so low.
  2. Contact the Chinese company and attempt to purchase the mark.
  3. Wait three years to see what, if anything, the Chinese side does with the mark. As you perhaps already know, if the mark has not been used in commerce for three years it can be cancelled for non-use. See China Trademarks: When (and How) to Prove Use of a Mark in Commerce.

Please let me know if you have any questions or would like to discuss further.

The real key is what we are always saying here on this blog: Register your trademarks in China. Like today.

Have you gotten one of these? What did you do and with what results?