foreign company doing business in China

Had lunch the other day with a bunch of people I consider to be China experts (to the extent there is any such thing).  During our lunch, GSK’s China corruption issues came up and we mused as to what was really happening in China by way of anti-corruption enforcement.  The following views were expressed:

  • China is serious about corruption and it is starting with the pharmaceutical industry because corruption is so entrenched there. China is going after both domestic and foreign companies, but we are just hearing more about the foreign companies. This is just part of China’s desire to reduce corruption because the Chinese people are really sick of it.
  • China is focusing on its pharmaceutical industry because its citizens are unhappy with medical care pricing. Why not go after a high profile foreign company to show the people that the cause of high medical care prices is foreign companies and we the government are aggressively working to solve the problem.
  • China is focusing on foreign pharmaceutical companies because it wants to do what it can to level the playing field for Chinese pharmaceutical companies. The pharmaceutical industry is of critical importance for China (both domestically and worldwide) and it does not want foreign companies dominating this industry.
Upon reflecting on that lunch, I come up with the following takeaways (pun intended):
  • Nobody really knows where and when the Chinese government will strike next when it comes to corruption. We all just know that it is striking a lot more often than it used to and striking against a much more varied list of companies (the smaller foreign companies that have gotten hit have for the most part managed to stay out of the news).
  • If you are a foreign company doing business in China in an industry the government deems important or politically sensitive, you should be extra worried/cautious.

One of the things I keep hearing while here in China is increased monitoring of laws by Chinese authorities. I am hearing this both from those who are happy about this change and those who are unhappy.

One of our clients complained how a bank yesterday would not allow it to engage in a transaction our client tells us he had done many times before. When we explained to him how the bank was only following the law, he rightly pointed out how the law it was following had been in place for nearly a year. In a discussion I had with Andrew Hupert last night, he told me of how much better Shanghai is now than when he first came here five years ago. I asked him what made it better and he put “increased enforcement of laws” right after “better restaurants.”

Today’s Asia Wall Street Journal hammers home China’s increasing crackdown on law violations. The article by Loretta Chao entitled, China’s Visa Crackdown Reflects Olympics Anxiety, discusses a recent crackdown on visa violators in Beijing. The article mostly ascribes the visa crackdown to the Beijing 2008 Olympics, but I see it as being more than that. I see this as very similar to the disallowed bank transaction. Both are attempts to reign in foreigners who violate China’s laws and is motivated at least in part by a desire to improve tax collection by cracking down on foreigners working without permission.

Bottom Line: The trend is clear, unrelenting, and unequivocal. The number of Chinese laws aimed at business is increasing and enforcement of those laws is increasing as well. If you are a foreign company doing business in China, you would be wise to take note of this.

A client recently directed me to a U.S. government web site on IP protection in China and asked me if it is accurate.  Not only is it accurate, but it does as good a job as I have seen in distilling the basics of China IP law into a readable form.

Entitled, The Best Protection is Prevention, the article starts out by describing China’s overall IP protection regime, and then briefly discusses how China handles, patents, trademarks, copyrights and trade secrets:

Though China is a party to international agreements to protect intellectual property (including WIPO, Bern Convention, Paris Convention, among others), a company must register its patents and trademarks with the appropriate Chinese agencies and authorities for those rights to be enforceable in China. Copyrights do not need to be registered but registration may be helpful in enforcement actions. A brief summary of China’s patent, trademark, and copyright laws are described below.

Patent: China’s first patent law was enacted in 1984 and has been amended twice (1992 and 2000) to extend the scope of protection. To comply with TRIPs, the latest amendment extended the duration of patent protection to 20 years from the date of filing a patent application. Chemical and pharmaceutical products, as well as food, beverages, and flavorings are all now patentable. China follows a first to file system for patents, which means patents are granted to those that file first even if the filers are not the original inventors. This system is unlike the United States, which recognizes the “first to invent” rule, but is consistent with the practice in other parts of the world, including the European Union. As a signatory to the Patent Cooperation Treaty in 1994, China will perform international patent searches and preliminary examinations of patent applications. Under China’s patent law, a foreign patent application files by a person or firm without a business office in China must apply through an authorized patent agent, while initial preparation may be done by anyone. Patents are filed with China’s State Intellectual Property Office (SIPO) in Beijing, while SIPO offices at the provincial and municipal level are responsible for administrative enforcement.

Trademark. China’s trademark law was first adopted in 1982 and subsequently revised in 1993 and 2001. The new trademark law went into effect in October 2001, with implementing regulations taking effect on September 15, 2002. The new trademark law extended registration to collective marks, certification marks and three-dimensional symbols, as required by TRIPs. China joined the Madrid Protocol in 1989, which requires reciprocal trademark registration for member countries, which now include the United States. China has a “first-to register” system that requires no evidence of prior use or ownership, leaving registration of popular foreign marks open to third party. However, the Chinese Trademark Office has cancelled Chinese trademarks that were unfairly registered by local Chinese agents or customers of foreign companies. Foreign companies seeking to distribute their products in China are advised to register their marks and/or logos with the Trademark Office. Further, any Chinese language translations and appropriate Internet domains should also be registered. As with patent registration, foreign parties must use the services of approved Chinese agents when submitting the trademark application, however foreign attorneys or the Chinese agents may prepare the application.

Copyright. China’s copyright law was established in 1990 and amended in October 2001. The new implementing rules came into force on September 15, 2002. Unlike the patent and trademark protection, copyrighted works do not require registration for protection. Protection is granted to individuals from countries belonging to the copyright international conventions or bilateral agreements of which China is a member. However, copyright owners may wish to voluntarily register with China’s National Copyright Administration (NCA) to establish evidence of ownership, should enforcement actions become necessary.

Unfair Competition. China’s Unfair Competition Law provides some protection for unregistered trademarks, packaging, trade dress and trade secrets. The Fair Trade Bureau, under the State Administration for Industry and Commerce (SAIC) has responsibilities over the interpretation and implementation of the Unfair Competition Law. Protection of company names is also provided by SAIC. According to the TRIPs Agreement, China is required to protect undisclosed information submitted to Chinese agencies in obtaining regulatory approval for pharmaceutical and chemical entities from disclosure or unfair commercial use. China’s State Drug Administration and Ministry of Agriculture oversee the marketing approval of pharmaceuticals and agricultural chemicals, respectively.

There you go. And all of great importance for any foreign company doing business in China.

China’s globalization is influencing its laws and its law enforcement. What this means for business (and hence the title of this series) is that China’s laws and law enforcement are evolving towards the West.

In previous posts in this series (here, here, and here), we talked about cases where Chinese courts have issued rulings that would not be at all unusual in California, but were groundbreaking legal decisions for China. We used these cases to extrapolate the changes cursing through China’s legal system. In our last post in this series, here, we wrote on how China’s lawyers judges and prosecutors are studying law overseas and how that will impact China’s own legal system.

This post focuses on a recent case, detailed in a China Daily story, entitled, Landmark ruling for consumers against airlines. I see this case as less landmark and more par for a rapidly changing course of Chinese consumer cases.

The case involved a China Southern Airlines passenger who sued China Southern for not allowing him to board an overbooked flight for which he had bought a ticket. When this passenger tried to check in for his flight, China Southern would not allow him to board because he had been “bumped by overbooking.”

China Southern then arranged for him to take the next flight and upgraded him to a first-class seat. This next flight was due to leave at 10:39 pm, two-and-a-half hours later than the original flight.

The passenger accused the airline of obscuring the truth, causing him to be delayed at the airport and violating his rights and interests. He retained a Chinese attorney and sued the company, seeking a public apology and 2,600 yuan in compensation, or double the cost of his ticket.

The airline argued that bumping because of overbooking is an internationally accepted practice aimed at hedging against possible losses.

The People’s Court of Chaoyang District ruled in favor of the plaintiff and against China Southern, holding that the airline should refund the 1,300 yuan the passenger spent on his ticket for having failed to inform him that he might not be allowed to fly as planned.  The court also ruled that the airline had not cheated the passenger.

The article described overbooking in China as a “fairly new concept” and “few airlines bother to tell passengers about it.” The court sent a letter to the General Administration of Civil Aviation (CAAC) suggesting it draft regulations on air ticket overbooking.

The article describes this ruling as having been “without precedent in China,” but this is not really true.  This probably was the first time a passenger successfully sued an airline in China for having failed to inform passengers of the potential for overbooking, but it certainly is not the first successful China consumer misrepresentation case. Though the article rightly notes that Chinese courts “have traditionally favored large enterprises and government departments in consumer-initiated lawsuits, even as such disputes have grown increasingly common in recent years,” there has in the last few years been a decided shift in Chinese courts toward the consumer in misrepresentation claims.

If you are a foreign company doing business in China, you should take note.

Just came across an amazingly comprehensive article on the ins and outs of foreign companies engaging in construction in China. The article is written by Ashley M. Howlett, who heads up the China construction practice at mega law firm, Jones Day. The article is entitled, “China: The Impact Of The WTO On China’s Construction, Engineering, And Design Industries: Five Years Of Change And Challenges For Foreign Companies,” and it is so specialized and legally technical, I am not going to attempt to summarize it.

For those in construction trying to figure out whether and how to attempt to get into China and then how to do business in China once there, this article is a great place to start. It also makes for interesting reading for anyone with a foreign company doing business in China.

A few weeks ago, we did a post, entitled, China’s Service Sectors Will Reign, Part IX — World’s Best for Medical Testing, touting China as the place for offshore clinical testing. A couple of readers left comments raising ethical issues arising from medical testing in China.  These issues are of such importance that we are responding to them here in this post, rather than in the comments.

Davesgonechina checked in first with this comment:

Clinical trials anywhere in the developing world, as you are no doubt aware, can be quite controversial. There’s been some coverage (in the journal Nature, and some links at SciDev.net below) about the lack of a good medical ethics structure in China for trials, and the possibility of lack of consent by informed patients. I realize your clients are not looking to subvert international or Chinese standards, but the system is fraught with flaws.

I knew a researcher in China who studied blood supply management that included Hepatitis testing. He discovered a nightmare – mislabeled or unlabeled samples in unorganized collections, no standard practice on informing patients (you’ll be told of your test results by phone, by mail, come to the office in two weeks, results will be in a brown paper bag behind a steam-pipe at the KTV at 3 am Friday morning – some patients were never told they were even being tested, let alone told if they were positive). If problems like these exist, clinical trials will no doubt sometimes be carried out with similar deficiencies.

I also taught at a medical university, and I routinely heard of students and professors falsifying data to achieve desired results. There was no disincentive or watchdog mechanism to prevent this.

If one day it is revealed that your clients had contracted out trials to a Chinese hospital that failed to inform patients properly or misrepresented data, what actions would you advise them to take? What precautions do they take now?

The second post, from nanheyangrouchuan, was a bit more tongue in cheek:

The “human rights” dragon raises its head again. China has a vast pool of patients and even more importantly, desperately poor who will put themselves through anything just to make a yuan. Just like “compliant” Chinese factories geared for outsourcing, any inspectors from Western pharma companies will at best get a dog a pony show while the meat grinder in the back room works its magic on its victims. And Western pharma companies can claim complete ignorance!

Yeah, QC in china is a big problem, look at the cars. And you will trust a drug tested in China coursing through your veins? It’s a perfect storm for more thalidomide babies: western companies wanting inexpensive and sort of reliable testing and the Chinese testing companies want to maximize profits and increase their western pharm customers with “perfect results”.

I’ll be shifting my healthcare plan to holistic healers, native American medicine men and power crystals. Much safer.

Clinical testing on humans (and animals) will always be fraught with ethical issues and this blog is not the place for big ethical discussions because none of our China lawyers have either the background or the inclination to address such issues. One of the best professors I have ever had, Roger Dworkin, is a world leader in medical ethics, and knowing how much he knows in this area tells me my knowledge is but a grain of sand.

But at the same time, I cannot help but wonder whether the ethical issues of medical testing in China are any different from anywhere else.  Since medical testing is nearly always done on the poor (or the young),I am not convinced the ethical issues in China are any different in theory, though they certainly are in application.  I do not doubt that China is rife with nightmares of testing, but unless that means proper testing in China is an impossibility, that should, at least in theory, not impact the ethical issues involved.

As for how an American company can prevent the big problems of medical testing in China, our answer is pretty much the same as what  would we give to any foreign company doing business in China. We actually touched on this a bit in our first post on testing in China, China Medical Testing Gone Bad. In that post, we talked about an American company that conducted medical testing in China in reliance on a Chinese hospital’s assurances that everything was being done according to Chinese law. In that post, we set forth the following three rules (the first two having come from a previous post, entitled, Free China Legal Advice: Do Not Sign A Contract You Do Not Understand, dealing with Chinese contracts in general):

Rule Number One for doing business in China:  do not sign a contract in Chinese unless you know exactly what it says as you will be bound by that contract.

Rule Number Two for doing business in China: the last person you want to be your translator on a contract is the person with whom you are contracting. If you do not know Chinese, bring on someone you trust completely to translate for you. Better yet, hire an experienced China attorney fluent in Chinese.

We are adding a third one:

Rule Number Three for doing business in China: Do not use anyone as your lawyer except your own lawyer.

The gist of the list I gave of major problems to avoid when doing business in China (cribbed from the U.S. Government) in my post on P. Diddy’s China fur problems, P. Diddy Does Not Know Diddly About China also makes sense here as well:

  • Inadequate vetting and due diligence of Chinese partners, distributors and suppliers
  • Giving away too much in joint ventures
  • Absence of contract clauses guaranteeing licensing compliance spot checks
  • Lack of appreciation of what differentiates a commission from a kickback in the Chinese context
  • Failure to register your IP (patents, trademarks and copyrights) in a timely fashion.
  • Failure to keep a detailed eye on the always changing legal and regulatory environment in China

Like all companies doing business in China, medical testing companies must conduct due diligence on the parties with whom they are dealing, they must have contractual provisions providing for spot checking on the testing, and they must conduct those spot checks.  Medical testing companies in China must also “appreciate” what differentiates China (and its medical testing) from that of their home country.  Even more so than is the case with most other companies, they must keep a constant eye on the legal and regulatory environment surrounding China testing and constantly make sure they are following all applicable laws.

I cannot answer davesgonechina’s question regarding the recommendations I would give to a Western medical testing company encountering legal problems in China because any such recommendations would be so closely tied to the specific legal problem.  However, I can say that due to the sensitive nature of the potential problems, it likely would make sense for the medical company encountering legal problems to bring in an experienced crisis management team to deal with the likely public relations fallout.

I admit it. I have a strange obsession with China RoHS. This is my fourth post on it (see here, here, and here) and so far, near as I can tell, nobody but me and a other China lawyers and a few engineering nerds who make their living consulting on it give a hoot. I mean, we are talking about labeling of goods and who cares about that?

Well if you are a foreign company doing business in China maybe you should. PCBOO7, which describes itself as the “only real-time online magazine for the Printed Circuit Board (PCB) Design industries” (like we thought there would be 100 of these things?) just did a big story on China RoHS. The new law is called “Management Methods for Controlling Pollution by Electronic Information Products” but everyone is calling it China RoHS.

The article is titled China RoHS: The New Definition of March Madness 2007 and it compares the upcoming March enactment of China RoHS with the NCAA basketball playoffs. I can see it now: come March everyone is going to be talking about China RoHS, not the NCAA basketball playoffs. Get real.

But China RoHS is likely to prove of critical importance and it does seem to be getting ignored. PCB007 (what’s with the 007 anyway?) calls it “undoubtedly the biggest environmental action in 2007.” PCB007 sees China’s new RoHS laws as “sure to cause chaos at best” and I agree.

It is set to go into effect on March 1, 2007, and it will regulate lead, mercury, hexavalent chromium, cadmium, polybrominated biphenyl flame retardants and polybrominated diphenyl ether flame retardants.

The new laws will require Chinese-language environmental labels on some 1,800 specific parts, components and materials that China considers Electronic Information Products. This is in the first phase.

The second phase, which PBC007 describes as “a Black Hole,” will involve product “subsets” that will have its own specific set of regulations. Little is known as yet about this second phase, but it is believed these products will require pre-market certification labels, which in turn will require you have your product tested at one of 18 government approved Chinese test labs. PCB007 rightfully asks what this will do in terms of intellectual property theft.

China will publish a catalog listing what will be covered as of March 1, 2007, but it has yet to do so. Get your translators and your China attorney ready.

I have a very bad feeling about these new laws. Above all, I am afraid they will be applied only to foreign companies. I am also afraid the Chinese inspectors will not know what they are doing and will act arbitrarily. It is never easy to just come out with comprehensive and complicated laws like these, particularly without adequate preparation.

I have said it before and I will say it again. If these new laws might apply to your business, begin now to familiarize yourself with them.  Oh, and enjoy the games.

Elizabeth Economy just did a Washington Post article on how and why China is blaming foreign companies for China’s own pollution problems. Entitled, A Blame Game China Needs to Stop, it discusses how China is seeking to diffuse international criticism of its environmental record by “launching a political campaign that lays much of the blame for the country’s mounting environmental problems squarely on the shoulders of foreigners.”

We told you so.

Ten months ago, in a post, entitled, Is China Going Green? — Part VII — Doesn’t Matter Because You Should No Matter What, we wrote how “people often get very emotional about the environment and I can see Chinese citizens getting very angry at a foreign company whose units in China are less environmentally sound than their units in the United States or elsewhere.”

That day is now.

The Washington Post article notes “growing international and popular discontent over the country’s environmental crisis,” has led China’s leaders to tap “into anti-foreign and nationalist sentiments to deflect attention from their own failures”:

In late October a top environmental official, Pan Yue, accused the developed countries of “environmental colonialism”: of transferring resource-intensive, polluting industries to China and bearing as little environmental responsibility as possible. At the same time, a leading member of China’s National People’s Congress claimed that foreign companies were not only exporting their waste but also underpaying Chinese workers. When a Chinese nongovernmental organization released a list of 2,700 companies cited for violations of China’s water regulations in late October, the ensuing media frenzy focused exclusively on the 33 multinationals, including 3M, Panasonic, PepsiCo and DuPont, and ignored the more than 2,600 Chinese companies similarly cited. Not surprisingly, Chinese bloggers have taken up the call, discussing the “eco-colonialist” policies of multinationals and calling for “eco-compensation.” Even environmental activists who have worked closely with multinationals have accused these corporations of not practicing what they preach.

As the article notes, “scapegoating foreigners can be an attractive policy option.”

It most certainly is.

As we have written previously, and as those doing business in China well know, forcing foreign businesses to abide by Chinese laws that either do not apply to domestic companies, or which domestic companies ignore, is going on across the board. Foreign companies are to unionize, while domestic companies are not generally required to do so. Foreign companies are to pay their taxes, while domestic companies often do not. Foreign companies must operate fully legally, while domestic companies typically need not.

When Westerners proclaim (as they fairly often do) to our China lawyers that China’s laws are essentially the same for foreign companies doing business in China and Chinese companies doing business in China, we typically respond with something like, “and that means what in real life?”

So what’s a foreign company doing business in China to do? You can get Beijing to change its policies and become even-handed — just kidding.

Or, you can come clean by following all rules. Register your company in China; the crackdown on this is already in full force. Pay your taxes in China. Do not pay bribes. Ever. Follow international environmental standards. In other words, forget about the so-called “Chinese way,” as that never really applied to you anyway, and it certainly does not apply to you now. Complain all you like, but the wise thing to do is to heed the advice of our own Steve Dickinson, and start recognizing there is a “new paradigm” in town and you as a foreign business must abide by it.

For more on the Chinese government’s distinguishing between foreign and domestic businesses, check out, China Policy — Let Mikey (Foreigners) Do It and China’s Corporate Tax System to Become Unified — Someday.