Just about every month I give a talk on how to protect IP from China and just about every speech I start off with something like the following:

If you are doing business with or in China, you have to plan on someone in China making a play for your intellectual property.  It’s not a matter of if, but when. It may be your partner, your distributer, your manufacturer, your sales manager, your top scientist, your supplier, or your customer who seeks to take and then use your IP.  Big Chinese companies steal IP.  Small Chinese companies steal IP.  State owned Chinese companies steal IP.  Privately owned Chinese companies steal IP.  And despite the beliefs of many Americans just starting out in China, Chinese companies with people who speak great English and invite you to their family weddings also steal IP.

In the last few weeks, I received two calls involving companies whose excessive trust led to their getting burned in China. The first call went something like the following:

Caller:  My husband is very trusting. He met the seller and looked him in the eye and the guy spoke really good English and my husband just knew that he could be trusted. They had dinner together two days in a row. We sent him $60,000 and now he is not even responding to our emails. My husband has found another supplier and I am wondering if there isn’t something we can do to make sure that he does not do the same thing. My husband insists this guy is also honest.

Me: Reminds me of what Bush said about Putin and look what Putin has been up to lately. I much prefer the Ronald Reagan’s  “trust but verify.” Here’s the thing. My law firm’s China lawyers get at least one call or email pretty much every week from someone who got ripped off or cheated or maybe just shortchanged by someone in China. And probably 99% of those cases, the people calling or emailing us started out trusting their Chinese counter-party. In fact, I don’t remember a single instance where the caller or the emailer told us that they knew from the get go that they were doing business with a crook.

There are a lot of things we can and should be doing to verify that your potential supplier is legitimate. Let’s talk….

The second call was from a company that had spent hundreds of thousands of dollars setting up a subsidiary in China, hiring employees, and hunting down business, only to have its entire team leave the company to form their own.  That conversation went something like this [by the way, I secured approval from both parties to discuss their situations here — in fact, both encouraged that we do so]:

Caller: But I set them up. I gave them good jobs. They owed me. They were my friends.

Me: Did you have a formal written employment agreement with them that set out trade secret protections? Did you have a non-compete agreement with any of them?

Caller: No, because I had worked with all of them for years before I started my China company.

People, I really hate to sound cynical here, but the reality is that if you are doing business in China (or anywhere else in the world for that matter) the most likely people to do you wrong are those whom you trust. The people you do not trust are usually not going to get access to your money or your secrets.

So, yes, you do need contractual protections against even those you trust. Check out Chinese Contracts. Because They Really Do Make A Huge Difference.

What do you think?

Every so often one of our China lawyers will get an email from someone who essentially challenges us to tell them why they should hire us. Our response is to patiently explain why they are wrong to think that they do not need a lawyer and to not so patiently tell them that it would probably not be a good idea for us to represent them. We do this because we long ago learned that taking on a bad client is never a good idea and that trying to convince someone to hire you who believes that do not need to do so never works out.

I got such an email the other day from an American company that seemed downright angry that one of our clients “had insisted” that they contact us:

________ at ________ [our client company] insisted that I contact you about our China manufacturing plans even though I have been doing business with China for more than twenty years.  ______ tells me that you believe that contracts with China manufacturers can be worthwhile but I know that it is the government there that determines everything. I want to stop my Chinese manufacturers from copying my products and selling them to my competitors. I doubt any contract can do this for me but can you lay out for me exactly how your company can help me, how long it will take and what you will charge. They just signed the attached NDA but ________ keeps telling me that I should have you modify it. If you are going to do that, I will need it back by the end of the week.  I also am enclosing a manufacturing agreement my lawyer drafted for me and I would appreciate your point of view as to how realistic it is.  We made it very favorable for my company.  It is approximately 10,000 words and so I also need to know what you will charge to revise it. I need this back by the end of the week as well.

Here was my response:

I hesitate to spend time on this because I do not think that you will retain us both because you have come to us too late for us to fix your NDA (which, quite frankly, does not achieve what you want it to achieve) and because you are neither going to believe nor like what I have to say. So I instead urge you to read  How To Stop Your Chinese Supplier From Becoming Your Competitor and China Contracts. Why Even Bother? and all of the links contained in these.

What you have done so far is unlikely to help you in dealing with Chinese manufacturers. It just does not sound like you have received good advice so far and I have to wonder whether that is because you have been hiring the wrong China attorneys (or no attorneys at all) or if it is because you are not interested in changing how you do business with China.

An American NDA with jurisdiction in Chicago is not likely to have any impact on a Chinese company. What you need is not really a China NDA at all, but an NNN (Non-Disclosure, Non-Use, Non-Circumvention) Agreement that protects you before you have actually chosen a particular manufacturer for your product.  This sort of agreement can go a long way towards preventing potential or future manufacturers from stealing your design.

The ability to sue in Chicago is not likely to give you any power over a Chinese manufacturer. The bottom line is that Chinese manufacturers do not fear foreign litigation as much as they fear being hauled into a Chinese court and hit with liquidated damages (or even worse, a pre-judgment seizure of their assets). The goal with our NNN agreements (and of all our China contracts) is to prevent the Chinese company from doing what you don’t want them to do, not so much to beat them if you end up having to sue.

There is no point in our using your existing NDA as a template because it would take us more time to do that than for us to use our own template and then modify that to suit your current needs. More importantly, non-disclosure isn’t really the risk you face; it’s non compete that really matters and your NDA is completely silent on that. Your biggest risk isn’t your Chinese manufacturer disclosing your product to someone else; your biggest risk is your Chinese manufacturer making your product.

I spent five minutes reviewing your manufacturing agreement and that was enough time for me to determine that too also isn’t close to what you need for China. Honestly, it isn’t close for what you would need in the United States either. It does not mention any penalties for bad quality nor does it set forth any sort of timeline. These two things are the most basic provisions one expects to see in such an agreement. It reads as though a non-lawyer cobbled it together from various contracts on the internet. You probably would be better off with no contract at all.

And there is no way that we can promise you anything by the end of the week because we do not even have a good idea yet of exactly what it is you really need. You are going to need to determine whether you are prepared to spend money to do things right in China contractually or just continue muddling through. You know what I would recommend, but of course it is entirely up to you.

I never heard from him again.

The title is stolen from the Warren Buffett line, “You can’t make a good deal with a bad guy, regardless of any piece of paper. And it is so true.

Our China lawyers are always telling our clients the following:

  • Legitimate Chinese companies do not want to get sued. In our experience, they are even more concerned about getting sued than are American companies. They do not want to get sued because getting sued is both expensive and damaging to their reputation.
  • Crooked Chinese companies do not mind getting sued, because they can always just shut down and they have little to no reputation to protect.
  • The above means that a good contract with a good company can be very valuable at making sure the Chinese company does what you want it to do.
  • A great contract with a crooked Chinese company has virtually no value at all, because the crooked Chinese company does not much care.
  • The above means that you must be careful about with whom you do business in China (or anywhere for that matter).  Do your due diligence before you contract.

There are three primary reasons for having a good contract with your Chinese counter-party.

1.  Clarity. The first is to achieve clarity. To make sure you and the Chinese company are on the same page. For example, if you ask your Chinese supplier if it can get you your product in 20 days, it will say “mei wenti,” or not a problem, pretty much every time. But if you put in your contract that the product must ship in 20 days AND for every day it is late, the Chinese company must pay you 5% of the value of the order, there is a great chance the Chinese company will get honest with you and tell you that 20 days is impossible. At that point, you and the Chinese company can figure out a more realistic time frame and then you know what to realistically expect going forward. Needless to say, we can give countless examples of this sort of thing, but this is yet another reason why our China attorneys advocate putting your contract in Chinese. Clarity before you start the relationship is critical.

2.  StrictureThe second benefit of having a well written Chinese language contract with your Chinese counter-party is that the Chinese company knows exactly what it must do to comply. And, in most cases, it might as well. Let’s use the 20 day example as the example here too. If your Chinese manufacturer makes widgets for 25 foreign companies and five of those foreign companies have very clear time deadlines with a very clear liquidated damages provision in their contracts, and the Chinese company starts falling behind on production, to which companies will the Chinese manufacturer give production priority? Of course it will put the five companies with a good contract at the front of the line. Why wouldn’t it?

3.  Enforceability. My firm has written hundreds and hundreds of China contracts and we have never once been called on to litigate any of them nor are we aware of any of them having been litigated. We attribute this to reasons #1 and #2 above, and this just reinforces our claim that good contracts help prevent problems. It also bears mentioning that the World Bank ranks China 19th among 189 countries at enforcing contracts.

What do you think?
Many months ago, I was in on an email exchange between a couple of our China lawyers regarding a liquidated damages provision in a product development agreement where our client was paying a Chinese manufacturer a lot of money to develop a new product that could be taken into production. Our biggest concern with the product development arrangement was that the Chinese manufacturer would sell the product to others after our client paid the large sum of money to have it developed.  So we wrote the contract to prohibit that and to give that provision added force we put in a liquidated damages provision listing out exactly how much our client would be entitled to in damages were the Chinese manufacturer to violate the non-compete provision forbidding them from making the product for anyone else.
Wikipedia nicely defines liquidated damages as follows:
Liquidated damages (also referred to as liquidated and ascertained damages) are damages whose amount the parties designate during the formation of a contract for the injured party to collect as compensation upon a specific breach (e.g., late performance).

We really like liquidated damages provisions in our China contracts because Chinese courts tend to view contractual liquidated damages provisions very favorably and so long as they are not unreasonable, they will usually be enforced. Most importantly, courts will seize Chinese company assets based on a liquidated damages provision and they will seize these assets before trial. Chinese companies know and fear this. A well-crafted China contract with a well-crafted liquidated damages provision is one of the best tools out there for preventing your Chinese counter-party from breaching your agreement, and that is the primary reason for having a contract in the first place.

In this particular product development contract, we put in a high number for the liquidated damages provision and the Chinese side immediately accepted it. This led co-blogger Steve Dickinson to write the following email:

Yes, _________  [our client] asked for a high number and I put it in at their request. Interestingly, the Chinese side signed with no complaint and with no objection from their Chinese attorneys either. I think that Chinese companies that do not plan to default simply don’t have a problem with contract damage numbers in this kind of agreement. The companies that complain are to be viewed with caution.

In terms of contract damages, it is important to be clear. As with the US, the number is not intended as a penalty. It is intended as an honest effort by the parties to predict damages in advance. If the number is too low, the injured party can ask for more. If the number is too high, the defendant can ask for a reduction. In either case, the validity of the contract itself is not affected.  The advantage of liquidated damages is that it gives you a sum certain when you go to the court to ask for preliminary relief such as seizure of assets. As long as a court is involved, the Chinese companies know that prejudgment asset seizure based on the amount of contract damages is a real risk and this makes them much more compliant in dealing with these issues. Where arbitration is involved, liquidated damages has far less utility, which is yet another reason why international lawyers should not be so quick to jump for having China contract disputes resolved via arbitration.
For more on the effectiveness of liquidated damages provisions in China contracts, check out the following:

A few months ago, co-blogger Steve Dickinson and I went on an extended  legal/business trip to Ho Chi Minh City and Hanoi, during which we met with around a dozen Vietnamese lawyers. One of the questions we asked nearly all of these lawyers (mostly because we kept getting different answers) was “what should we be putting in our contracts with Vietnamese companies, by way of a venue provision?” In other words, which of the below options would be best for our mostly American (with a smattering of European and Australian) clients:

  1. Litigation in the courts of the home country of our client.
  2. Litigation in the courts of Vietnam.
  3. Arbitration in Vietnam.
  4. Arbitration outside Vietnam.
In typical lawyer fashion, we decided that it depends.
Which is why we are writing this post as the facts and our analysis and our conclusion hold equally true for China.
Each of the above options has its pluses and its minuses and picking the right venue truly does depend on the specific situation, both for Vietnam and for China.
We will go through each of the options, highlighting each of their major plusses and minuses.
  • Litigation in the home country (within America or Europe or Australia) has the big plus of providing to the home company its greatest chance of prevailing. Litigation in America, Europe and Australia also tends not to require a large upfront filing fee/arbitration fee. But the downsides almost always outweigh the plusses, with the biggest downside being that neither Vietnam nor China will enforce the court judgments of most foreign countries. So if you are suing a Chinese or a Vietnamese company overseas and you prevail, you likely will have no means for collecting on your judgment/enforcing your judgment in either China or Vietnam. If the Chinese or Vietnamese company has assets in a country that will enforce such a judgment, then it is a different story, but that is rare. We only rarely write contracts with Chinese or Vietnamese companies that call for litigation outside of China or Vietnam, respectively. It also bears mentioning that litigation is public and has the potential to be the most expensive option of all.
  • Litigation in the courts of Vietnam or China. The biggest plus for litigating in a China or a Vietnam court is that the courts in both countries are best equipped to enforce a judgment, be the judgment a monetary one or one requiring the Vietnamese or Chinese company to do something, such as stop violating intellectual property rights. The biggest downside of the courts of both Vietnam and China is that they tend not to be well equipped for handling complex commercial matters and they are sometimes biased against foreign companies.  These negatives are much greater in Vietnam than in China and for that reason our China contracts far more often call for litigation in China than our Vietnam contracts call for litigation in Vietnam.
  • Arbitration in Vietnam or China. The biggest plusses for arbitrating in Vietnam and China are that it is quite possible to have good arbitrators, have an arbitration in English, and have good chances of enforcement. The minuses are that it is also quite possible not to have good arbitrators and to have an arbitration in Chinese or Vietnamese. The costs can also be high and enforcement (particularly of a non-monetary award) can be slow. The other day a China lawyer proudly told me that he never lets his clients agree to arbitration within China. The reality though is that Chinese companies (especially SOEs) are increasingly mandating in-country arbitration (this is also true of Vietnam). If you are going to do an arbitration in either China or Vietnam, it is absolutely essential that your arbitration provision be written so as to avoid the numerous pitfalls possible with this.
  • Arbitration outside Vietnam and China. The biggest plus with this is that you can choose wherever you want (Hong Kong, Singapore, Geneva, New York, Toronto, Sydney, Stockholm, wherever) and you can fairly easily get great arbitrators. The biggest minus (truer of Vietnam than of China, but true of both) is that enforcement of a foreign arbitration award can be slow and, even worse, can also be spotty. Be very careful here in that both Vietnam and China prohibit foreign arbitrations of certain disputes.
My law firm has written contracts providing for all of the above, depending on the confluence of the facts. There are no hard and fast rules covering every situation when dealing with either China or Vietnam.

It is common to read articles with statements like this: “Contrary to popular belief that enforcement of arbitration awards in China is very difficult, statistics show that less than 10% of arbitration awards are set aside by Chinese courts”.

This is very misleading. Talk to those who actually work on arbitration enforcement and the picture is reversed: most awards are settled rather than enforced, and although courts hardly ever set aside awards, they do nothing at all – which of course favors the Chinese party.

It really does just depend….

 For more on litigation versus arbitration, check out the following:

Not easy issues.  What do you think?

I am going to be speaking at USC this weekend and in poring over old PowerPoints (to create a new PowerPoint for my talk), I came across one with a fairly extensive China law bibliography of some of our most helpful posts.  This bibliography is definitely slanted towards the legal issues that confront foreign companies doing business in China.

Here it is:

CHINA CONTRACTS

CHINA LICENSING AGREEMENTS/CHINA DISTRIBUTOR AGREEMENTS/CUSTOMS

CHINA COMPANY FORMATION/CHINA WFOE FORMATION/CHINA JOINT VENTURES

NEGOTIATING WITH CHINA

CHINA —INTELLECTUAL PROPERTY

Whenever I am asked to review a contract between a US company and a China company, I nearly always go straight to the dispute resolution clause.

Much of the time when I am asked to review such a contract, it is by someone who did not use our law firm to draft the contract and is now asking us to review their contract because something has gone wrong.  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.

The reason is that China does not enforce US court judgments. So what this means is that if your contract requires that all disputes between you and your Chinese counter-party must be resolved in a US court, you will be required to sue the Chinese company in a US court.  But 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.

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).  More lawyers are catching on to this and we are seeing fewer contracts that call for US court jurisdiction.  But we are now starting to see contracts that are getting too specific about the Chinese court in which disputes will be resolved.

And that itself can be problematic.

The reason for our concern about overly specific Chinese court jurisdiction provisions is that the Chinese courts tend to ignore any attempt by contracting parties to dictate where a matter will be litigated. Instead, Chinese courts typically determine the proper jurisdiction for a dispute based on the nature of the claim, the amount of the claim, the location of the parties, and the location of the witnesses to the dispute.

If your choice of Chinese court jurisdiction is wrong, the Chinese court will — at best — ignore it. But at worst, your mistake could raise questions about the validity of Chinese Court jurisdiction or create other confusions.  The whole reason for putting in a dispute resolution clause is to avoid the expense, the time, and the uncertainty of where and how to resolve any disputes.  There is therefore no reason to add language that appears to increase certainty, but which in practice will have exactly the opposite effect.

For more on positioning yourself to be able to collect from a Chinese company in litigation/arbitration, check out the following:

Got the following message on linkedin a few weeks ago:

Been following [China Law Blog] for about 8 or 9 months — it’s been helpful as I’ve been setting up a foreign branch here (sourcing appliances for overseas), preparing employment contracts, renegotiating OEM deals, etc. The site is by far the most useful, practical, concise advice I’ve had on dealing with legal issues here in China. I had all the management dealing in China subscribe as well. Thanks for the resource you guys provide — cheers.

I got it more than a week ago, but  I have yet to respond.  We have been writing this blog for going on eight years and this is the first time it ever occurred to me that someone would think that the snippets of information we provide here are enough for writing international cross-border contracts. Does this person (a non-lawyer) really believe that he is now qualified to act as a China lawyer and write cross-border US-China contracts.  His email has left me nonplussed and I do not know how to politely respond.

But I first want to talk about another, earlier email I received , along with an article in today’s local (Seattle) newspaper.

The other email was from someone who had just attended a continuing legal education course in which one of the speakers talked about the importance of having a disclaimer on your blog so that readers realize that a blog is not the equivalent of legal advice.  This person emailed me with this information to make sure that we had such a disclaimer.  I emailed back saying that we have the following disclaimer:

This Blog is made available for educational purposes only, as well as to give general information and a general understanding of the law. It is NOT to provide specific legal advice. By using this blog you understand there is no attorney-client relationship between you and the Blog publisher. You should NOT use this blog as a substitute for competent legal advice from a licensed professional attorney

I then talked about how stupid I find such disclaimers and of how unnecessary they are, but that out of an overabundance of caution, we have had one since our inception.  This email correspondence with the lawyer predated the email from the person who apparently uses our blog exactly as we tell people not to do.

The article to which I refer above is a Seattle Times interview with Gary Locke, the US Ambassador to China. In that interview, Ambassador Locke is asked what advice he would give to American businesses that want to do business with China, and he responds as follows:

There are great opportunities but be very careful. Study the market. Perform due diligence. Get outside advice from experts in the law and so forth. It’s tempting to enter into a two-or three-page contract with a Chinese partner. But that won’t be adequate to protect you from disputes or other hiccups that can happen.

Correct.

Here’s the deal people.  Every single contract is what we in the law call sui generisor one of a kind.  This is why my law firm always refuses to provide “template” or “generic” contracts.  Whenever someone asks us for a template contract or a copy of one that we did for someone else, we always refuse no matter how much they offer to pay.  We will not stake our reputation (and our malpractice policy) on a contract that almost certainly will not be right for the company seeking to purchase it. And if the contracts we draft for our own clients are not good enough when used off the shelf, certainly our blogged advice on how to draft such contracts has even less value.

Now for some examples.

We often write of how we generally (generally is the key word here) write our contracts in Chinese with a China court as the jurisdiction.  Generally, but not always.  If the contract is with a Hong Kong entity, we usually do not want a China court.  What if the contract is with a Hong Kong parent company and its mainland manufacturing subsidiary?  There is no one answer.  What if the Chinese company has substantial assets in the United States?  Well then US jurisdiction might very well make sense. And it is not as though this is an unimportant issue; if you get it wrong you may end up having no remedy at all.

We also often write about how well liquidated damages provisions work in Chinese contracts. But even if we assume that someone other than an experienced China lawyer can write a liquidated damages provision that makes sense, for what amount will that provision be written?  There is no one right amount; choosing the amount is at least as much art and experience as science.  We base the amount usually on the nature of the contract, the value of the transaction, and the court in which the dispute will be resolved. It is not at all uncommon for two to three lawyers to discuss this amount before it is finalized.

I could go on and on.

Lest anyone still thinks drafting a China contract is easy, I urge you to check out the following:

Not going to tell you that using our blog as a guide for drafting your China contracts is the equivalent of using a blog as a guide for performing open heart surgery, but I will say that anyone who does either is making a huge mistake.

Does anyone really think otherwise?

 

About a week ago, we did a post, entitled, How To Write A China Contract. Arbitration Versus Litigation. Say Where?  That post discussed an issue that had been raised on China Group on Linkedin, (which just hit 7,700+ members): which forum is better for resolving disputes with Chinese companies, the courts or arbitration?  Our post came down favoring litigation in China (yes, in China) as usually being the best forum.

We talked of how when we seek to determine the appropriate forum for our China contracts, foremost on our minds is the following:

In figuring out what we are going to put in the contracts we write between our US clients and their Chinese counterparts, we first sit back and try to figure out the most likely breach of contract scenarios (either by our own client or by the Chinese company) and also the really critical breach of contract scenarios.  A bad delivery of $100,000 in product might be very likely, but that is going to pale in importance to the Chinese company taking over our client’s factory in China and ceasing all deliveries.  So between those two, we would probably write the contract to provide our client with the best forum for dealing with its factory being hijacked.

A recently issued Chinese Court ruling highlights why a Chinese court is oftentimes the best place to be for an American company seeking redress against a Chinese company. The ruling came from Shanghai’s No. 1 Intermediate Court in the case of Eli Lilly v. Huang, involving a trade secret dispute. The facts of the case are relatively simple.  Huang had been an employee of Eli Lilly’s Chinese subsidiary and he had signed a confidentiality agreement with the subsidiary agreeing not to reveal Eli Lilly trade secrets.  Huang downloaded 21 confidential documents from Eli Lilly’s server, without authorization.  Eli Lilly demanded Huang delete these documents, but he resigned “instead.”  Eli Lilly brought a trade secret misappropriation claim against Huang under China’s Anti-Unfair Competition Law, seeking injunctive relief and RMB 20,000,000 in damages.

The Shanghai court almost instantly issued an interlocutory injunction prohibiting Huang from disclosing, using or allowing others to use any trade secret information in the 21 documents he had downloaded.

This decision presents a number of good takeaways for foreign companies doing business in China or doing business with China, including the following:

1.  Put a trade secret provision in your contracts whenever appropriate.  These especially make sense in your employment contracts.  China does protect trade secrets taken by an employee even if you do not have a contract with that employee forbidding theft of trade secrets, but for various reasons, it is better to have it in your contracts as well, and that is exactly what Eli Lilly had done here.

2. If protecting your trade secrets are important to you, write your contract with that goal in mind.  This means figuring out the best forum for enforcing your trade secret provision. Typically, the best forum for enforcing your trade secret provision is going to be a court not an arbitration panel.  Yes, arbitration panels can sometimes get courts to issue orders stopping trade secret violations (and sometimes they can’t), but having to go through arbitration and then having to go through a court will greatly increase the time it will take to get such relief and also increase your chances of never getting such relief.  Typically, the best court for enforcing your trade secret provision is going to be the court with the most power over your Chinese counter-party.  Typically, that court is going to be a Chinese court because most Chinese companies do not have much that can be reached outside China.

3.  If getting your trade secret provision enforced quickly in a Chinese court is going to matter to you, do your contract in Chinese.  For more on this, check out Your China Contract Should Be In Chinese. Here’s Why.

How to write a China contract to protect your trade secrets?  Write it in Chinese, with a trade secret provision and the right forum set to enforce it.

Any questions?

 

Yesterday, at lunch, a couple of lawyers and I were discussing choice of law provisions.  I know that makes us geeks, but what can I say?  The discussion started when I talked of how I had been receiving an increasing number of “draft contracts” that called for applying “China and US law” to any dispute.  I told of how I had recently taken it upon myself to ask the client what that meant and of how no client could tell me.  Frankly, these provisions make no sense at all.  What does it even mean to apply two country’s laws at the same time?  What if there is a conflict between the two laws?  Is the court supposed to just pick one or try to merge them into one?  The bottom line is that putting this sort of choice of law provision in your China contract will only increase ambiguity and with it your costs.

We then talked of how we are seeing another recent trend, which is to provide that if the American company sues the Chinese company, it can sue in a US Court with US law applying, but if the Chinese company sues the American company, it can sue in a Chinese Court with Chinese law applying.  These provisions sometimes make sense, but if the Chinese company does not have assets in the United States, there usually is no point in suing there.  See Suing Chinese Companies In US Courts. The Pros And The Cons.  The other issue with this sort of choice of law provision is that it makes drafting the contract more complicated and expensive because the lawyer doing the drafting most figure out the laws of two countries (not just one) and then draft accordingly.

We then discussed our pet peeve: the contract that calls for disputes to be resolved in a Chinese Court but then calls for application of US law, or vice-versa.  The subset of this is arbitration in China in Chinese, under US Law or the opposite.  These sort of choice of law provision generate uncertainty and added costs.  Is a Chinese Court really going to enforce US law?  What US law?  US Federal law or the law of the US State with the most contacts or the law of the US State from where the US company has its head office or the law of the US State where it is incorporated?  And how will the Chinese Court familiarize itself with US Law?  And if it were to apply it, what would it even look like?  We have heard of Chinese Courts literally throwing cases out because they provide for application of US Law.

We recommend dancing with the one that brung ya.  By that we mean that if your dispute is going to be resolved in a Chinese Court or before a China-based arbitral body, it will almost always make sense for you to go with Chinese law in your contract.  And the converse is true if your disputes will be in a US Court or before a US arbitral body.

Any questions?