Archives: bad faith

The other day, Steve and I were emailing with a reporter regarding how Memoranda of Understanding, (MOU), are so different in China than in the United States and how that difference often causes early discord between Chinese and American companies.

Steve started the discussion by talking about the differences in the meaning of Memoranda of Understanding (between China (an essentially civil law country) and the United States (a common law country):

In the common law tradition like that in the United States, an MOU means little. Only a signed deal really counts. This is not true in the civil law tradition. In the civil law tradition, there is the concept of good faith negotiation. Under that concept, it is not acceptable to simply walk away from an MOU if that would constitute “bad faith.” Common law lawyers hate the concept, but it is deeply ingrained into the civil law tradition. In fact, it is a core concept in the Chinese contract law of 1999. Since the traditions are so different, you can see where conflicts may arise.

In practice, the Chinese side often will try to turn an MOU into a concrete commitment when it suits them and ignore it when it does not. This is how most people behave and it should be no surprise. The problem is that under Chinese law the Chinese side might be justified in insisting that the MOU is binding if the behavior of the foreign side constitutes bad faith.

What is bad faith? The standard example is signing a China MOU and then negotiating with two parties at the same time without informing the two parties and using the MOU to keep one party from taking the initiative on a venture. And then sign a deal with the other party, cutting the first party out of the deal. This sort of strategy is not rare in common law countries, particularly in the mining/minerals and other natural resources businesses. Under the common law, the party cut out under this scenario usually has no claim. Under Chinese law and under civil law, the party that has been cut out has a claim under the bad faith doctrine.

Very few common law lawyers are even aware of this issue or they say that the Chinese are “wrong.” However, China is a civil law country. It makes no sense to say the Chinese are just wrong. In fact, to the extent that the matter is subject to Chinese law, the Chinese are “right” by definition.

I then talked about how this difference in laws can so often lead to problems arising between Chinese and American companies:

The impact of this difference is that we frequently see the following: American company comes back from China and shows me their five page MOU and says that they now want to work on a contract .  I tell them that what they have given me is probably a contract.  They tell me that I’m wrong.  I tell them to tell their Chinese counterpart that they now want a contract and see what happens.  Virtually every time, the Chinese company tells the American company that there is no need for a contract and then the American insists that there is and then the Chinese party thinks the American is being a jerk.  The parties have already gotten off on the wrong foot.

Steve then summed up the problems:

Dan’s point is dead on. There is a major gap in legal systems here. It is not culture, it is the legal system itself. Both sides are behaving in a manner completely consistent with their own legal system. But in the end, both sides look to the other as though they are acting in bad faith, when in fact both sides are doing nothing more than trying to reach a deal as best they know how.

I then concurred with Steve:

Correct.  And the thing is that neither side has malevolent intent.  The Chinese side just puts a lot more stock in the MOU than the American side. The American side will sign the MOU thinking its nothing and planning to come back and turn it over to their attorneys to draft the final agreement.

And then the problem starts when we tell the American company that the MOU it just signed is almost certainly a legally binding contract and that it is virtually certain that the Chinese side sees it as a contract and that the contract is terrible and that “it needs the following ten things.”  The American company then goes back to the Chinese company with the ten things that need to be changed or added and the Chinese company then gets offended because it thought it had a deal and only super minor things needed to be resolved and those would be resolved over time.  So now you have a situation where what could have been a good relationship starts off on the wrong foot or fails to start off at all.

Bottom Line: MOUs are different in China and failing to realize this can lead to problems.

What do you think?

Trademark infringement with respect to domain names is a very common problem, particularly for those who do business with China or even just manufacture their product there. It is unsurprising that many in China are quick to register domain names similar to those of the foreign companies they see.

We frequently see the following sorts of domain name thefts, oftentimes by Chinese companies seeking to hone in on a well-known brand name:

  • Domain names that intentionally contain a common typo of a known trademark.
  • Domain names that take a known trademark and attach a generic word like “outlet” or a word descriptive of the product, such as “shoes.”
  • Domain names that are exactly the same as a known trademark’s domain name, but with a different extension.  For example, abc.net, instead of abc.com.

Companies confronted with domain name theft oftentimes do not realize how relatively easy it can be to put a stop to it, even when it is a Chinese company that is using the name. The Internet Corporation for Assigned Names and Numbers (“ICANN”) developed The Uniform Domain Name Resolution Policy (“UDRP”) to resolve domain name disputes, and international arbitration of disputes under UDRP is administered by a list of ICANN approved dispute resolution service providers.

Anyone who registers a domain name is agreeing to the registrar’s terms and conditions, including making a commitment to be bound by the UDRP.  The UDRP’s purpose is to prevent cybersquatting, which is defined “as registering, trafficking in, or using, a domain name with bad faith intent to profit from the goodwill of atrademark belonging to someone else.”  Tenneco Automotive Operating Company Inc. v. Naushad Dhukka / SoftDot Technologies, LLC,NAF, FA1104001384326 (May 31, 2011).

When a complainant demonstrates that another party is using a domain name in “bad faith,” the UDRP will either transfer or cancel the offending domain name at the request of the complainant.  We almost always recommend that the domain name be transferred to our clients so nobody else can grab it at some later date and force our client to go through the same UDRP domain name arbitration again.

Companies need to be proactive in locating and excising “bad faith” websites as soon as they are discovered because those offending sites can not only damage a company’s online presence, they infringe upon and can ultimately dilute legitimate trademark rights.

I was fortunate enough to have been invited to attend a recent session in Beijing convened by Nancy E. Kremers, the Senior IP Attaché to the US Embassy here.

The purpose of the session was for intellectual property lawyers from US firms, together with representatives of IP-dependent US companies, to brief the Attaché on current IP issues in China. It was also a chance for the attendees to get up to speed on the many US Government initiatives in this area.

One of the biggest concerns voiced at the session was the ongoing problem of “bad faith” in Chinese trademark law. I am not going to get into that too much here because others have already covered it adequately. Suffice it to say that there is a big problem in China with “pirates” or “squatters” who register in China a brand they have simply ripped off from the West. Restrictions against this sort of thing are tougher in most other countries, but in China it is extremely difficult, if not impossible, to get rid of someone who registers first, even if they do it in bad faith. This is what we were referring to in our earlier post on Chinese trademark law, entitled, Do you Feel Lucky? Do You?

One of the challenges faced by the U.S. and by other Western countries that try to plug the “bad faith” loophole or simply push to improve IP protection in China generally, is that many Chinese perceive this is being done for essentially selfish reasons, with little or no benefit for China. The fact that the Chinese are, at least during their current stage of economic development, net importers, or even copiers, of Western IP tends to underlie this perception. This state of affairs provides little incentive for improving protection on the part of the Chinese.

Anyway, the point I tried to make at the Attaché’s session was not about trademarks. What I conveyed was that the argument for improved copyright protection in China might be easier to get across in the context of the film industry. I brought this up because China’s domestic film industry suffers from piracy just as much as, if not more than, Hollywood.  Couple that with the abundance of Chinese producers, cast and crew wanting to work more with foreigners and you have a pretty good argument for lifting the barriers to foreign films as well.

In other words, not only would the local Chinese film industry benefit from better protection against piracy in China, it would also benefit from the general increase in local production that is likely to occur if the market opened up to foreigners.  Sure, strictly speaking that is also a trade issue, but it certainly is an IP-related trade issue nonetheless.

It is not the local Chinese film industry that wants to stop foreign films. Far from it. Barriers to entry such as China’s twenty foreign film quota, and the requirement that foreigners shoot their films in China as Chinese co-productions, are there to stem the invasion of Hollywood’s “corrupting” influences, which the  Chinese government sees as US propaganda or soft power. These barriers really have more to do with the government’s desire to preserve what it deems important than in protecting the local Chinese film industry.

All of this means that the foreign and the Chinese film industry should be able to work together to advance the film industry in China by expanding those who can make the films and by blocking those who seek to copy them.

For more on the legal issues foreign filmmakers confront in China, check out the following:

What do you think?