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China’s Film Industry Online, Part I

Posted in China Film Industry

China’s theatrical box office market may be huge but the ancillary revenues (i.e. non-box office) are still relatively small in China. This is the first in a series of posts on developments in China’s digital ancillaries in a lead-up to the US-China Film Summit, which I will be attending along with a number of other lawyers from my firm and a talk I will be giving on China’s film industry before the Beverly Hills Bar Association on November 3. In this first post, I seek to provide a frame of reference for a discussion of ancillaries in China.

In recent years, a market-based Chinese film industry has started to emerge from the shadows of the older, centralized and state-funded model. As Professor Eric Priest pointed out recently in Copyright Extremophiles, this may even be contributing to an expansion of acceptable content for China’s censors. Censorship aside, we are seeing a growing foreign interest in developing Chinese programs intended predominantly or solely for the Chinese market. This desire to produce content for the Chinese market brings with it an appreciation of the need for intensive co-development of programs with Chinese creatives from the very outset; not, as is too often the case, using a script written in English and hastily translated into Chinese before a trip to Beijing. On the flip side, China is increasingly recognizing and coveting Hollywood’s expertise and finesse accumulated over more than 100 years. All of these things are driving co-development deals with a view to producing content with both Chinese domestic appeal and international flare.

Whether they are producing programs for the domestic market alone or Hollywood blockbusters to be imported under China’s 34-picture quota, copyright stakeholders, both foreign and Chinese, must keep an eye on all revenue streams available in China, not just the box office.

China’s ancillary revenues have been small by world standards. Just how small is hard to say. According to Liu Chi, in a recent and comprehensive paper entitled Challenges for the Chinese Film Industry after 2013, ancillaries made up only 10% of China’s total 2013 film business revenue, with 90% of revenue coming from box office. According to the MPAA, China’s 2013 box office was $3.6 billion. That would mean ancillaries were worth about 400 million out of a total Chinese market of about $4 billion.  Compare this to the US, where ancillaries account for most of a film’s revenue. Again, precise figures are hard to come by but ancillaries are sometimes taken as accounting for around 75% of revenue, with box office representing the remaining 25%. According to the MPAA, in 2013 the box office in the US and Canada was $10.9 billion. That would mean that ancillaries were worth $32.7 billion in a total North American market of around $43.6 billion. China’s 2013 box office grew 27% on the previous year while North America’s grew only 1%. There is vast scope for further growth in China’s box office and, with it, the ancillaries market.

Despite the dominance of China’s box office as a source of film revenue, some of the most interesting developments here in China are occurring in areas of ancillary exploitation, particularly digital home entertainment. These developments are even more striking given China’s woeful internet speeds — China’s average internet connection speed is ranked 79th globally and 10th in the Asia Pacific Region. See Make Way for the Mobile Shopper, by Devon LaBuik.

My next posts in this series will explore these developments.

China Employment Contracts: Do Not Try This At Home

Posted in Legal News

Had a conversation the other day with the in-house counsel for a relatively small American company. This lawyer thanked me for the China Law Blog and said that he had used it to write his company’s employee contracts. I was stunned by this statement and to avoid me saying something I might later regret, I immediately changed the subject.

I have by now calmed down just barely enough to write this post.

Here is a list of the crazy risks this lawyer took by writing his company’s own China employment contracts, even though he clearly is not himself a China lawyer, nor does he have any real experience with China law:

1. He speaks no Chinese so whatever he wrote would need to be translated into Chinese (I am going to assume that he at least did this). Unless he hired an experienced Chinese employment lawyer to do the translation, the odds that the translation will actually work are about 10,000 to 1.

2. I wish that I had asked him whether he also drafted the Rules and Regulations for his company’s China employees. A China employment contract without Rules and Regulations is of virtually no value for a company. I’m betting that he did not.

3. Did his employment contract and Rules and Regulations include provisions regarding the FCPA, China anti-corruption laws, expense reimbursements, education reimbursements, housing reimbursements, overtime, vacations, bonuses, trade secrets, non-competes, etc.? If they did, what in the world made this lawyer think that he knew how any of these are supposed to work in China?

4. Did he check with the local labor bureau to determine its position on various employment law matters? These labor bureaus are all over the map on countless employment issues and the positions of these labor bureaus truly matters. I am virtually certain he did not.

One of our China-based lawyers, Grace Yang, spends several hours each week keeping up to date with China’s employment laws and regulations and maintaining strong contacts with local labor bureaus throughout China. She has conveyed a small portion of that knowledge via the following China employment law posts:

Please understand that your reading all of the above posts will not give you the knowledge you need to draft a China employee contract, just as reading a medical book or two does not qualify you to perform surgery.

China Copyrights: China Piracy Means Whack A Mole

Posted in Legal News, Recommended Reading

Just read a really good, really comprehensive article on China copyright law with a focus on the music industry, entitled, Whack-A-Mole: A Brief History of Music Piracy in China.

Its conclusion says it all, but I certainly suggest you read the whole thing:

In short, piracy’s root causes evade simple explanations and solutions, and piracy remains a serious obstacle to the successful monetisation of creative works in China. For their part, copyright owners in China can do little more than focus on the pragmatics of how to subsist as “copyright extremophiles,” surviving in inhospitable conditions.

 If you are interested in China IP law, I recommend that you read it.

Teaching English In China: Be Careful

Posted in China Business, Legal News

Every few weeks one of our China lawyers gets a somewhat frantic email from an English teacher in China and we hate them. We hate them because the English teacher is invariably in some terrible situation and the only way we can help is to spend massive amounts of attorney time on their case, which makes no sense for anyone.

Our typical email comes from an English teacher who has not been paid for three months and then gets fired and whose school refuses to give them the papers necessary for the teacher to move on to another job, unless and until the teacher signs an agreement settling back wages for pennies (and that’s if the teacher is lucky) on the dollar.

The teacher is usually writing to see whether they have “a good case” and to see what they “should do.”

Our response is usually something like the following:

If what you say is true and you performed three months of work and you have not been paid for that, then yes you have a good case, at least legally. But for you to collect on your back wages you will need to hire and probably pay a local attorney to assist you. That attorney will likely write a demand letter to your former employer, demanding it pay your back wages and handle all necessary paperwork to allow you to get another job right away. But the problem with this is that your employer will probably ignore the demand letter and that then means that you will almost certainly need to sue to get any recourse and by the time you sue and get your case heard, you will be sitting in China with no job and no real ability to get a job and I am guessing that is not acceptable to you. So probably the best thing for you would be to do whatever you can to get your ex-employer to complete your paperwork as quickly as possible. I suggest you retain a Chinese lawyer for this as it does not make sense for you to pay American lawyer rates to have our China attorneys work this case for you.

The above situation is by far the most common. The second most common is something along the following lines (this is an amalgamation of various emails we have received):

I am seeking your advice regarding the following situation.

I teach after school English to elementary students in ______[Chinese city].

Yesterday, I was taken to the police station with two coworkers and we were questioned and told that we were working illegally. Though I have a Z visa, it turns out that it is not under the right company name and it says that I do one thing though I am doing another.

I clarified with the police officer that returning to work the next day would be illegal and they confirmed it.

That was followed by my company going and bearing gifts to the police and setting up a system whereby for future inspections the police will call ahead to give the company an opportunity to send its foreign staff away before the police come.

The fine was to be issued today and we were told that we did not have to go to the police, but a letter later in the day said we will go tomorrow. The company will cover the fine.

I had a long drawn out conversation with my bosses where they explained Chinese culture to me and in their words, “there is a legal written law and a social law and the legal law is antiquated and doesn’t work anymore so the social law functions to help people get what they need in society.”

I was assured by my company that it was safe to return to work and that no more trouble would come my way. I would not be surprised if this is true, but the ethics of it is driving me crazy.  Is this really how business is done in China or should I be seeking other employment?

Are there any legal companies in China or is this the norm? And when I look for another job how do I confirm whether my potential future employers are legit or not?  Is there a list of properly legal companies?

Our typical response to this sort of email is something like the following:

Your instincts are right. Your employer is violating Chinese law up and down and though it appears to have so far gotten away with it, that may not continue and if it does not, you might find yourself in a very unpleasant situation. It is almost always a really bad idea to be operating illegally in a foreign country and it seems that is what you are doing.

Bottom Line: Don’t take a job in China without first making sure that both your employer and your job will be on the up and up.

China’s Legal, Regulatory and Cultural Aspects: November 1 in Los Angeles

Posted in Events

On Saturday, November 1, University of Southern California’s Pharmacy School will be putting on a China event focused on medical related issues, entitled, “Exploring China: Legal, Regulatory and Cultural Aspects.” It will focus extensively on China medical issues and it will take place in PSC 108, at the School of Pharmacy, USC Health Sciences Campus, 1985 Zonal Avenue, in Los Angeles.

The following people will be speaking on the following topics:

  • Frances Richmond, PhD, Director, International Center for Regulatory Science, will give the welcome address.
  • Helen Niu, MD, PhD, from Allergan, will speak on China’s Role in the Biomedical Industry
  • Annie Yin, DBA, from Medtronic, will speak on Medical Device Regulation
  • Yang Cao, PhD, from China Pharmaceutical University, will speak on China’s Health System and Policy
  • Ni Yuan, MSC, from  China Pharmaceutical University, will speak on Medical Insurance System in China
  • Yingfeng Zhu, Evaluator, Shanghai FDA, will speak on Medical Device Registration
  • Gerald Loeb, MD, USC, will speak on Innovation and Start-Ups

And I will speak on The Practical Aspects of Chinese Law and also on Intellectual Property Considerations

There will then be a panel discussion at 4:00 p.m. and a networking dinner at 5:00 p.m., for which a separate registration is required. I spoke last year at USC and I am confident this is going to be a great event. Come one, come all. Click here.

Five Keys To Getting Good Quality Products From China

Posted in Basics of China Business Law, China Business
Our China lawyers have assisted hundreds of Western companies with the legal side of having product manufactured in China. That experience has enabled us to see what works and what doesn’t for China manufacturing. If you want to greatly increase your odds of getting good quality manufactured product from China, you should do the following seven things.1. Use a Good Company.  Sounds rather basic, but we constantly see this rule violated. If you do nothing else that we suggest in this post, do this one thing as it matters as much as all the other things put together. For how to learn more about “your” China company, check out Basic China Due Diligence. Is This Chinese Company Legitimate?2. Use a Good OEM AgreementGood contracts ensure that your Chinese company knows what is required of it and what will happen if it fails to provide it.

3. Use Detailed Documents. Chinese factories tend to do exactly what you tell them to do. This means that what you tell them to do needs to be clearly conveyed and that means your instructions and specifications should be detailed and in Chinese. Be specific.

4. Visit the Factory. Either your own people or a third party QC company should pay regular visits to your factory. Doing this allows you to make sure it understands what you wand and lets them know that you are serious about making sure you get it.

5. Inspect. Perform regular product inspections appropriate to the product you are having made.

Do the above and your odds of getting good product go way up. Don’t do the above and they go way down.

Your China Distributor. Because What Happens In China Doesn’t Stay in China.

Posted in China Business

Forming a company in China is almost always difficult and expensive. Operating a company in China is also almost always difficult and expensive.

Operating a company in your home country of England, the United States, Canada, Australia or wherever is itself plenty difficult, would you not agree? Now take what you have to do in your home country and add in the inherent complexity of having to do essentially the same things in a foreign country with a foreign language with a different culture and under different laws.

That’s China.

China company formations are more difficult and expensive today than they were five years ago, and the same holds true for operating a company in China. Add to this that China’s consumers are getting wealthier and savvier and you can see why there has been a rapid increase in companies seeking to sell their products in China without establishing a company in China to do so.

One of the more common ways companies seek to sell their products in China without forming a company is by having a Chinese company act as their distributor. For more on this, check out Selling Your Product To China Through A Distributor. Just The Basics.

A few months ago, I was contacted by an American company that had been approached by a Chinese company wanting to be “the China distributor” for the American company’s fairly well known consumer product. At one point during our conversation, I talked about some of the issues we address in our China distribution contracts. I talked about how we put in provisions dealing with the intellectual property. I talked about how we like to see provisions that set out the Chinese distributer’s sales requirements.

I then talked about how critical it was that we conduct due diligence on the Chinese company. The client responded by pointing out that the distribution agreement would allow it to quickly replace its Chinese distributor if it turned out not to be a good fit, and so it did not seem like any real due diligence should be necessary. I then quickly reeled off a number of things the Chinese distributor might do in the first few weeks of the arrangement that could jeopardize the U.S. company’s reputation worldwide. The U.S. company instantly understood.

Bottom Line: What happens in China does not stay in China. If your Chinese counter-party does something disreputable in China that some people would link to your company, your company’s reputation likely will suffer. This “something disreputable” could be anything from a product defect to paying a bribe. Even if your company’s connection to the “disreputable something” is extremely tenuous, if your company name is in any way attached to it, your company will likely suffer. The best way to prevent that sort of problem is to choose your partner wisely and the best way to choose your partner wisely is to know as much as you can about it by engaging in appropriate due diligence.

 

Preventing China Counterfeiting: The Basics

Posted in Basics of China Business Law, Legal News

When Christmas is approaching, China counterfeiting goes into overdrive, and this year has been no different. The real trick to reduce counterfeiting is to do the things earlier in the year that can help to prevent it. The more you do before you face an infringement problem, the less likely you are to have an infringement problem and the more that can be done to stop the infringement problem once it starts.

At minimum, we recommend the following:

  • Register your trademarks and copyrights with China customs as soon as your registration is complete.
  • Do not allow your manufacturers to sub-contract the production of your products.
  • If you do allow your manufacturers to subcontract the production of your products, enter into a separate agreement with the subcontractors that will protect your intellectual property.
  • Have an OEM agreement with your manufacturers that imposes liability on them them in the event of infringement by any of their subcontractors.
  • Enter into a formal mold agreement that makes clear that your molds belong to you and that imposes a significant monetary penalty on the primary contractor if your molds disappear.
  • When contractors/subcontractors are changed, immediately seek to locate your molds and get them back. Do not wait. Much of the counterfeiting we see stems from missing molds.

If you do the above, your chances of having an intractable counterfeiting go way down. If you do not do the above, they go way up. It is that simple.

Doing Business In China: Whatever Happened To The Warm Welcome?

Posted in China Business

I spoke last week at the American Lawyer’s (truly excellent) China-US Legal Summit. During one of the “networking breaks” while talking with a group of China lawyers and China businesspeople, someone wistfully spoke of “the old days” when China encouraged foreign investment with economic incentives. Someone else then said that they’d be happy if China would “just” encourage foreign investment, even without economic incentives. Nobody disputed that the welcome mat for foreign investment in China has been pulled or has shrunk considerably.

There was a time when companies doing business in China or seeking to do business in China would eagerly await the newest version of China’s Catalogue for the Guidance of Foreign Investment Industries, expecting it to add a whole host of new industries open to foreign investment, either as a WFOE or as part of a Joint Venture. I get the strong sense that anticipation for the newest version of the Catalogue has declined mostly because expectations for change have decreased.

The Chinese government is right now considerably more concerned with social harmony and the contentment of its citizens than with economic numbers, and you should always factor this into your China business decisions. China’s slowing economy and “external” political issues only heightens the Chinese government’s focus on contentment.

If you are doing business in China, or even just considering it, you should be mindful of the following:

  • Though China’s economy is slowing, the government will continue to encourage wage growth that makes its factories less competitive. The reason: citizen contentment.
  • China will continue to get tougher on foreigners, just as it (and nearly every other country) has always done when times are tough. Everything foreign businesses do will be under heightened scrutiny. Doing this makes its citizens happy, which makes it a no-lose proposition.
  • Chinese authorities are increasingly eager to distinguish between “contributing” and “noncontributing” foreign businesses. It has never been tougher for foreign companies that pollute, pay low wages, or have no plans to hire Chinese employees to get their foot in the door.
  • Chinese exporters, particularly those competing with companies from lower-wage countries like Vietnam and Bangladesh in low-tech, low-wage industries such as textiles, clothing, shoes, and low-end electronics and toys are suffering. Anyone who does business with such exporters will soon be sharing the pain, if they aren’t already.

Now is the time for you to think anew about what your company contributes to China’s economy and how that is likely to shape Chinese policy makers’ opinions. Focus on scrupulous regulatory compliance and renew your focus on due diligence at a company-to-company level.

In other words, be cautious out there.

China Entertainment Law Event, Beverly Hills, November 3

Posted in China Film Industry, Events

Our Beijing-based China entertainment lawyer, Mathew Alderson, will be speaking at a Beverly Hills Bar Association Event, on November 3, 2014, from noon to 1:30, at 9420 Wilshire Boulevard. The event is China’s Entertainment Industry: Exploring the Evolving Legal and Business Landscape. Mathew will be sharing the podium with Malcolm McNeil of the Arent Fox law firm. Brian Schaller of O&A PC will be the moderator.

Variety Magazine named Mathew a game-changing entertainment lawyer for his China work representing a number of the major Hollywood studios. Last month Mathew gave a similar talk in Beijing before the Foreign Correspondents Club.

A large contingent of our China lawyers will be at this talk and we hope to see you there. Click here for more information