China sourcing contractsOne of the first things our China lawyers do when working with a company having products made in China is figure out the contracts and IP registrations that will ensure our client’s intellectual property and other rights will be protected as against its Chinese manufacturer and the rest of the world. In doing so, our China attorneys typically choose from the following manufacturing related agreements and IP registrations:

1. NNN Agreement. NNN Agreements are basic agreements that protect the confidentiality of your products and prevent your Chinese manufacturer from competing with you or circumventing you by going directly to your customers (non-disclosure, non-compete and non-circumvent. Their highest and best use is usually before you chose your specific Chinese manufacturer. Oftentimes an NNN Agreement is not needed because it makes better sense to put the substantive provisions from the NNN Agreement into a Product Manufacturing Agreement, described below. NNN Agreements normally are relatively simple agreements but for one to work with China it must be done correctly and using an off-the-shelf American or European NDA Agreements will not work for China. See Why Your NDA is WORSE Than Nothing for China

2. Mold/Tooling Protection Agreement. This agreement makes clear that the molds/tooling you are having made for you will actually belong to you and cannot be used to make products for anyone but you. Without such an agreement, when you seek to move your production to a new manufacturer, your old manufacturer will very likely keep your molds/tooling. Without this agreement there is also a good chance your old (or even your present) manufacturer will use “your” molds/tooling to make “your” products and compete with you. Just as is true with China NNN Agreements, it often makes sense to skip this agreement and put its substantive provisions into the Product Manufacturing Agreement. For more on these agreements, check out Manufacturing in China: Control Your Molds (Part 1), Manufacturing in China: Control Your Molds (Part 2) and Manufacturing in China: Control Your Molds (Part 3).

3. Product Ownership Agreement. This agreement makes clear the product you are co-developing with your Chinese manufacturer or having made by your Chinese manufacturer belongs to you. This makes sure you have something in writing and enforceable in both China and in any other country in which your product is going to be sold. Without this agreement, your Chinese manufacturer may be able to claim ownership to the IP rights in “your” product and register a patent in “your” product in China and in other countries. See China and The Internet of Things and How to Destroy Your Own Company. This agreement is rarely needed because a Product Development Agreement or a Product Manufacturing Agreement usually can cover the product ownership issues.

4. Product Development Agreement. This complicated agreement should set out the terms of your product development relationship with your Chinese manufacturer, In particular, it should specify who will own what of the finished product and who will pay for what to develop the finished product. These agreement should make clear what you will be paying in product development costs and it should set out the various milestones your Chinese product manufacturer must meet to get paid. At minimum it should address (1) the product to be developed, (2) the technology the foreign company and the Chinese manufacturer will contribute to develop the product, (3) who will provide the product specifications and in what form, and (4) who will own the IP rights to the final product.

5. China Manufacturing Agreement. This agreement is often called a Product Sourcing Agreement or OEM Agreement. These complicated agreements should clarify pretty much everything between you and your Chinese manufacturer and unless you are spending small amounts on your product purchases, you need a China Manufacturing Agreement. Among other things, this agreement usually should — at minimum — address the following:

Quality

Timeliness

IP ownership

Mold and/or Tooling ownership

Non-compete, non-circumvention, non disclosure See NNN Agreements above

Sub-supplier/sub-contractors

Liquidated damages for breaches

6. China Trademarks. If you are having your product made in China you should secure a trademark for whatever brand name (and probably whatever logo) you are putting on your product or its packaging. If you don’t do this, someone else probably will and then they will use their trademark to stop your product from leaving China. You also should secure trademarks in the countries in which you will be selling your product because trademarks do NOT cross borders. Getting a China trademark is nearly always essential.  See China: Do Just ONE Thing: Register Your Trademarks.

7. China Patents. If your product is innovative or distinctive in its function or its design you should consider securing a China invention or design patent. These patents can be valuable/necessary to protect your product against copying and to prevent someone else from registering a patent on your product in China and then using that patent to stop you from manufacturing your product in China or from leaving China’s ports. See China: Do Just ONE Thing: Register Your Trademarks AND Your Design Patents.

The thing we as lawyers always need to focus on is maximizing value/protection for our clients will minimizing costs. This involves choosing the right agreement(s) and the right registration(s) at the right time(s) and doing everything correctly. See China Contracts: Make Them Enforceable Or Don’t Bother and China OEM Agreements. Why Ours Are In Chinese. Flat Out.

Easy-peasy, right?

China IP lawyersChina (Shenzhen mostly) is the primary destination for manufacturing of small electronic consumer products. And since Internet of Things (IoT) products are red hot, this means our China lawyers get a steady stream of China IoT legal matters.

The big issue we most often see is this: the IoT product has now reached the mass production stage and is being produced in large quantities. Now that it has a commercial product, the U.S. or European (usually) buyer now seeks financing for its start-up company. The financier (be it angel, VC, private equity, or even someone’s father-in-law) then asks who owns the intellectual property in the product? With the rise of the Internet of Things (IoT), this question is often difficult to answer definitively.

How did we get to this point where the IP rights of a product are so often vague? The process has worked its way through three general stages:

Stage One. In the good old days (roughly 1981 to 1995), the situation was simple. There were two possibilities. In the first, the Chinese manufacturer made a standard consumer product. The foreign buyer purchased that existing product and perhaps required the Chinese manufacturer take the extra step of placing the buyer’s own trademark/logo on the product. In that setting, ownership of the intellectual property was clear: the Chinese manufacturer owned the product design and the foreign buyer owned its trademark/logo. In the second, the product was a long standing, well developed product of the foreign buyer. The foreign buyer brought the completed product to the Chinese manufacturer and contracted with the Chinese manufacturer to make a copy. In that setting, ownership of the intellectual property was clear: the foreign buyer owned all the intellectual property and the Chinese manufacturer owned nothing.

The simplicity of this sort of relationship encouraged the somewhat lazy practice of documenting the entire manufacturing relationship with purchase orders. NNN agreements, product development agreements and OEM agreements were seldom used, since IP ownership was clear and the price and delivery terms were resolved via the purchase orders. This approach would often lead to product defects, but that is for another post.

Stage Two. In stage two (roughly 1995 to 2015), a new form of manufacturer-buyer relationship developed. Foreign buyers began coming to China with no completed project in mind; they instead would come with a product idea or proposal. The foreign buyer would then work with the manufacturer to co-develop a product. In some cases the Chinese manufacturer would simply take a completed prototype and commercialize that prototype for mass production. In these cases, the foreign buyer arrived with little more than a basic idea and the two sides worked to co-develop the product. See China Product Development Agreements, for pretty much everything you need to know about China product development agreements.

The Chinese manufacturer usually would perform the product development work at its own expense, with the implied agreement being that it would be the exclusive manufacturer of the product. This co-development process typically used the same lazy “purchase order only” approach from stage one. This approach then led to the many issues we see today that make answering the “who owns what IP” question so difficult. To do the co-development process properly, the parties must define their relationship with three agreements: 1) an NNN Agreement, 2) a Product Development Agreement and 3) an OEM Agreement.

When these agreements do not exist, a standard set of issues arises: Who owns the product design? Who owns the molds and other tooling? Who owns the manufacturing know-how and similar trade secrets? If the buyer decides has the product made by a different Chinese factory, what compensation is owed to the Chinese manufacturer that co-developed the product? What are the  Chinese manufacturer’s obligations to comply with the foreign buyer’s price and quantity requirements? If the Chinese manufacturer terminates its relationship with the foreign buyer and manufacturers the product under its own trademark/logo, is this a violation of any agreement between the parties? Absent clear written agreements, none of these questions have clear answers. In these unclear situations, the Chinese factory will nearly always be in a much stronger position than the foreign buyer and the Chinese factory will typically prevail in any IP dispute.

Stage Three. In stage three (2015 to today), we arrive at the IoT era. In designing, developing and manufacturing consumer products for the IoT market, the already unclear and problem-filled relationships of the stage two era are now magnified. In the IoT era a whole new set of issues has arisen. In the stage two era, there was at least the simplicity of two entities designing and/or manufacturing a single product. In the IoT era, the situation is considerably more complex. In most of the IoT projects we have done, the development process has expanded to include the following:

1. Product “concept” from the foreign (usually United States or European) buyer.

2. Product external design, from an international design firm.

3. Internal design and function, owned by:

a. The foreign buyer;

b. The Chinese manufacturer;

c. The provider of sensors and other components required to connect the IoT product to an outside network.

4. Design of the IoT product “app” (usually for smart phones). This involves two completely separate sets of software: the communication sending software residing on the IoT product and the communication receiving software residing in the application. In the same manner as the internal design, these software components may be written/designed by multiple parties: the foreign buyer, the Chinese manufacturer and (quite often) third party software design firms.

What happens then when the product is complete, and manufacturing is ready to start and the foreign buyer starts to seek funding: The funding source almost invariably will ask who owns the IoT product? Who owns its underlying IP? What our China lawyers have far too often found when we ask the foreign buyers these questions is that they usually don’t really know.

This “we don’t know” response does not sit well with potential sources of serious financing. Even worse, when the foreign buyer is pushed to answer the question, it becomes clear that it is not clear who owns the new product. Far too often the only ownership issue that is clear is that the one entity that the foreign buyer is the one entity that does NOT own the rights to the product. Even worse, it is usually not possible to fix the situation by this point.

Bottom Line: As manufacturing in China and the IP issues attendant with that become more complex, it becomes even more important that you have clear written agreements that answer the obvious IP questions in advance. It does not make sense for you to devote your time and your energy and your money developing an IoT product for someone else to own.

For more on the issues involving China and the Internet of Things, check out the following:

China IP protectionsOn the evening of April 25, I will be speaking live in Barcelona at a Red Points event on international and China IP protection. The event will be on the eve of World International IP Day and it will be to celebrate Red Points’ launching its online brand and trademark platform offering free lessons on detecting, validating and enforcing intellectual property rights across the internet.

This event will be live-streamed on April 25th as well, at 9:00 AM PST, 12:00 PM EST, 6:00 PM CEST. For more information, go here and to register (it’s all FREE), go here to register.

 

China employment lawyerOn April 18, Grace Yang, our lead China employment lawyer, will be putting on a webinar on “Employment Laws for Female Workers in China.” To call this webinar timely would be an understatement, as the issues involving female employees in China could not be more relevant/topical/important.

The live webcast will be this Wednesday, April 18, 1:00-3:15pm PST / 2:00-4:15pm MST / 3:00-5:15pm CST / 4:00-6:15pm EST.

LawProCLE, who is putting on this webinar, describes it as follows:

Foreign companies doing business in China face complex China labor and employment issues every day and issues related to female workers require additional attention. The Chinese government has high expectations regarding how employers must treat female employees, especially those who are pregnant, nursing or on maternity leave. Employers need to know and follow the national, provincial and municipal laws and regulations regarding protection of female employees. Female employee disputes are increasingly common in China and both the government and the courts are getting increasingly tougher against employers that fail to treat their female employees appropriately.

This webinar will give you the information you need to spot employment law issues relating to your female employees and arm you with ways to avoid and mitigate problems.

Grace’s talk will focus on the following:

  1. The key China employment laws on protection of female workers
  2. The employer rules, regulations and policies you need for your China employees
  3. What you need in your employment toolkit to reduce your risk of sexual harassment claims
  4. Female employee special leaves
  5. Female employee terminations
  6. China employer audits

LawProCLE describes Grace as follows:

Grace focuses on international business and China law. She is Harris Bricken’s lead attorney on China labor and employment law and recently authored a book entitled the China Employment Law Guide. Grace is admitted to practice law in the States of New York and Washington. Grace received her bachelor’s degree from Peking University School of Law (“Beida”) and her J.D. from the University of Washington School of Law. During law school, Grace won “Best Written Contract” in the University of Washington Contract Drafting & Negotiation Competition and the Pro Bono Student of the Year Award for her involvement in several community-based volunteer legal service projects.

Grace has spoken at a ton of seminars and webinars on various different aspects of China employment law and always to rave reviews and you do not want to miss this one.  For more information and to sign up, click here.

 

China distribution contracts
China distribution contracts

Last week, in China Distribution Contracts: The Questions We Ask, we wrote about some of the initial questions we ask our clients for whom we are drafting China distribution contracts. That post started out discussing how forming and then operating a China WFOE is difficult and expensive — see Forming a China WFOE: Ten Things To Consider and Doing Business in China with Deportation or Worse Hanging Over Your Head on why having a WFOE is a must if you will be doing business within China. We then discussed how our China lawyers have been seeing many more foreign companies choosing to sell their products to China via distribution relationships rather than via a WFOE. For the basics on what it takes to establish and document distribution relationships with Chinese companies, check out the following:

Today’s post focuses on some of the additional questions we often ask our clients that have retained us to draft their distribution agreement with a Chinese company or companies. As with last week’s post, it consists mostly of an amalgamation of emails from our China attorneys seeking more client information and providing additional client assistance before drafting a China distribution agreement.

1. How are you planning to deal with warranties? A standard approach is for you to draft the warranty and then have your distributer pass on this warranty to consumers without any changes. Under this approach you will need to work with your distributor to design an appropriate warranty that a) works for your products, b) works for your company and your distributer, c) meets market demands, and d) complies with Chinese law.

The alternative is to allow your distributor to provide whatever warranty it wants to consumers. Your warranty is with the distributor and you will not cover any warranty beyond that which you have specifically agreed with your distributor. Under this sort of arrangement you have no contractual relationship with the consumers and the consumers have no legal basis to assert warranty claims against you. They are limited to making claims only against your distributor. This option is consistent with the legal status of a distributor that buys and then resells your products. However, under this approach you no longer control the nature of the warranty and many of our clients do not want to give up this control.

Much can depend on the nature of your product, your consumers and your trust in your distributer. We should discuss all of these things by telephone.

2.. Determining the sales price to consumers. Normally, the distributor is free to set the prices it wants for the products, since it has purchased the product and therefore owns them. However, many of our clients wish to exercise at least some pricing. Absolute resale price maintenance is not legal in China so you cannot dictate the sales price. You can, however, require your distributor to work with you on pricing and even set a pricing product range, both maximum and minimum. Please advise on how you want to proceed on the pricing issue.

3. What form training will you provide to your distributor? Where will your provided this (in China or in your home country)? How will training costs be determined and who will pay those costs?

4. Do you want to require all communications from your distributor be in English?

5. Will your technical documents be translated into Chinese? If yes, who will do this? You or your distributor and who will cover these costs? 

Please advise on the above. We will begin drafting your distribution agree  responses are complete.

China employment lawyersAs I have previously written, during its new hire on-boarding process, China employers should confirm there are no encumbrances or restrictions on any new hires coming to work for your company. In particular, employers should make sure there are no in-force non-compete agreements. Let me explain why this is so important.

Though non-compete agreements are generally disliked by China’s administrative and judicial authorities, many employers like to have a non-compete agreement in place with every employee they hire, even part-time workers. Moreover, many employers prefer to have an elective agreement where the employer has the right to decide whether or not to enforce the non-compete agreement upon termination of the employment contract. In other words, the employer gets to decide whether it will pay the employee for not competing for a certain period of time after the employee’s departure, or whether the employee can “go free” without any restraints. The legality of such an elective arrangement depends on where you are located in China, but for purposes of this discussion let’s assume such terms are in fact legal and enforceable.

It makes complete sense for the employer to want to wait until the end of the employment term to see if the employee possesses any proprietary information worth protecting, since things may change during the course of employment. This especially makes sense because in China the employer must pay its departing employee not to compete.

What though happens if the employer does nothing when the employment relationship ends. Usually,“no action” on the part of the employer means the non-compete agreement does not come into force. If this is the employer’s intention it’s probably okay. But if the employee is both expecting and wanting a non-compete payment from you as his or her employer and you have not clarified the non-compete issue at time of termination, the employee may send you a demand for payment or even bring a lawsuit against you to enforce the non-compete. To avoid this battle and headache, if you decide you are not going to enforce the non-compete provision or contract, your best course of action is to make this clear to your departing employee before the employee’s departure. Doing this virtually always stops a terminated employee from suing for non-payment on a non-compete.

But what if you as the employer want to enforce your non-compete provision or agreement? In this case, you will need to inform the employee that you are electing to enforce the non-compete and you should also be sure to comply with all of the terms of the non-compete, including paying all non-compete compensation due to your departing employee. You should put your employee(s) on notice of your intent to enforce the non-compete via a clear writing to the employee. And by this I mean a hard copy document with clear language (in Chinese if your employee is Chinese) setting out your intention to enforce the non-compete. In most China jurisdictions, an employer who does not affirmatively confirm its desire to enforce a non-compete will be deemed to have waived its right to enforce the non-compete after three or so months. The exact number of months an employer can go without being deemed to have relinquished its rights to enforce a non-compete depends on the locale — as is true for just about everything else relating to China’s employment laws. See China Employment Law: Local and Not So Simple.

In the old days, when China non-competes were less complicated, our China employment lawyers pretty much always suggested to our clients that they put non-compete provisions in their China employment contracts. Nowadays though, we suggest they balance their need for a non-compete against the risks that such a provision or contract could eventually cause them problems. For example, what happens if you use a non-compete that automatically takes effect upon the employee’s termination and you have no intention of enforcing it when the employee leaves but you forget to terminate the non-compete when processing the employee’s departure? Though this too depends on your locale, in many of China’s cities, this will mean you will either need to reach agreement to pay your employee for a mutual termination of the non-compete or you do not pay any non-compete compensation and you run the risk of a Chinese arbitrator or judge determining that you are “stuck” with the non-compete because you knowingly signed a binding agreement that included one..

The bottom line is that you should be careful with your non-competes and that means not just inserting one without thinking through the repercussions of doing so and being very careful to act on any non-competes before any impending employee termination.

China gaming lawyersChina presents a wealth of opportunities for foreign gaming companies, but (and this is true of pretty much every IP-laden industry), it also presents substantial risks. See Gaming the System? Foreign Access to China’s Online Gaming Industry.

This post sets out the basics on how online gaming companies can protect their IP in China via China IP registrations. Though our law firm represents a host (sort-of-pun intended) of online gaming companies, we have been hesitant to write specifically about largely because it is not all that legally different from other industries. But because we have lately been getting emails requesting we do so, we will. Starting now.

The big thing to know about China IP laws as they relate to online gaming is that there really are no IP laws specific to online gaming. China’s IP laws relevant to online gaming are the same trademark and copyright and patent and IP licensing and trade secret and unfair competition laws we constantly write about on here. But though the laws are the same, how best to apply them to the particular product/industry — online gaming — differs. Our China IP lawyers generally view the IP work we do for our gaming company clients as similar to what we do for our movie and music and software and publishing (especially comic books) and toy company (especially dolls and character figures) clients.

China Online Gaming Copyright Protections. Copyright laws usually come into play when you are talking about “content” and when you are talking about online gaming, you are essentially talking about content. Online games are typically rife with copyrightable content, including the characters in the game, the music, the speaking, the story-line, and the animation. Oh, and of course the code

Registering copyrights for online games in China is very much like doing so in the United States and in Europe. Because of this, when we do such registrations, we usually just track what has already been done in the U.S. or in Europe. Registering video game source code in China typically consists of registering the source code using China’s special software registration rules. When it comes to registering the artwork in games, our normal strategy is to treat each character as a work of art. If there are special locations, these are also treated as a work of art. All the artwork is usually then collected into a bundle and is registered in one filing. The exact physical item that is sent to the registration authority depends on the nature of the work. Registration is not expensive and it is better to register too much rather than too little.

China Online Gaming Trademark Protections. As regular readers of this blog well know, we are huge fans of registering China trademarks. It is bad enough if someone copies your game but if they can legally give it and its characters the same names you gave them, it becomes nearly impossible for you to distinguish your game from the copy. Enforcing trademark rights in China is generally easier than enforcing a copyright rights and that’s why trademarks should always be considered for the name of the game and the names of the characters. The key thing you should know about China trademarks is that they usually take around a year to secure. This means you should file for your China trademarks as soon as you have an idea of what you will be calling your game and/or its characters.

China Online Gaming Patent Protections. Patents are still pretty uncommon in China for online games, but there will be instances where securing one will make sense. It really just depends.

Protecting your gaming IP requires you think ahead and act ahead. And as is true for pretty much all industries in China, the biggest benefit in your securing China trademarks and copyrights and patents will likely not so much to give you the ability to prevail in a lawsuit against an infringer, but to make potential infringers think twice before copying you. If given the choice (and to a certain extent infringers are given this choice) between copying your game that is loaded with registered China IP protections or copying a game with few or no China IP protections, the infringer more likely to pass your game by, which is exactly what you want.

 

China trademark lawyersForming a WFOE in China and then operating that business in China is difficult and expensive. See e.g., Forming a China WFOE: Ten Things To Consider and also Doing Business in China with Deportation or Worse Hanging Over Your Head on why having a WFOE is a must if you will be doing business within China. Because of this, our China lawyers are seeing increasing numbers of foreign companies choosing to sell their products in China via distribution relationships rather than via a WFOE. For the basics on what is involved in establishing a distribution relationship with a Chinese company, check out the following:

Today’s post focuses on some of the questions we often ask our clients that are looking to do distribution agreements with a Chinese company. It consists mostly of an amalgamation of emails from our China attorneys seeking more client information and providing additional client assistance before drafting a China distribution agreement.

 

I have the following basic questions and comments regarding your agreement.

1). For payment terms. The standard is as follows:

a. Shipping terms can be CIF or ExWorks. For products like yours, ExWorks is common, since estimating shipping and insurance costs can be quite difficult. If you do not know the port, you should not quote prices CIF and you should instead quote either Free Carrier (most common) or Ex Works. Either way, your distributor would be responsible for the shipping cost to the port of its choosing. It might be Shanghai for one shipment, it might be Qingdao for another shipment. That would be their decision and you want to leave the terms flexible so they can make the decision in a way that will not put you at a financial disadvantage.

I recommend you do not include price in the agreement but instead provide that your products will be sold at your normal distributor export price pursuant to a price list you will periodically provide to your distributor.

b. China’s letter of credit system is not very effective. If you ship your products before receiving payment for them, you are taking the full risk that the Chinese side will not pay. Our clients usually deal with this in two ways:

i. Conservative manufacturers require full payment before they ship.

ii. Less risk averse manufacturers ship on 30 days after the date of shipment (Net30) terms. These manufacturers provide for the right to shift to payment before ship terms if there is a problem.

2. You indicate wanting your proposed distributor to make advance payment for enough product to cover three months of projected sales. You need to specify an exact amount that must be purchased of each product and you also need to specify the sales terms. Your situation is further complicated by your not having Chinese government import approval yet for any of your products. For the first shipment, even where Net 30 terms are standard, most manufacturers require payment in advance of shipment. If you are not able to provide specific details in the agreement, we will provide that the exact terms of the first shipment will be determined after import approval is received. The agreement will terminate if that purchase is not completed by some certain date.

3. You have provided us with the sales milestones you want for your China distributor. This is always a good idea in a exclusive distributor arrangement but more detail is necessary, including the following:

a. You have discussed milestones for only one of your products. Will you have milestones for your other products as well? If yes, when will they be established and in what quantities?

b. Sales milestones for China distributors are usually set on a quarterly basis and not broken down by province. In formulating your sales milestones, you probably will want to account for the fact that there is not yet China government approval to import your products. If you plan to set sales milestones now for your other products we can do that as part of this agreement.

c. You can, of course, set the sales milestones at whatever level of specificity you desire. This is a business matter, not a legal requirement.

The issue of sales milestone is usually a big issue in this kind of agreement, so setting the milestones in a way that is clear and simple to understand is important.

4. When there is an exclusive agreement the term/length of the agreement becomes of critical importance. The normal procedure is to provide for a term long enough to give the Chinese distributor time to earn back its efforts in promoting your products. A three year term is typically the minimum, with five years more common. Most China distributors that plan to put in substantial work to market and sell your products will require the distribution agreement to automatically renew if they achieve their sales milestones. The China side will often want a provision saying that if the parties cannot agree on new milestones after the end of the first term, renewal will be automatic based on some predetermined formula. Chinese distributors that do not require something like this are oftentimes not planning to do the work necessary to succeed.

You mention wanting either party to be able to terminate the agreement with 90 days notice. Though such a provision is legally acceptable under Chinese law (which generally is far more liberal in what it allows in these agreements than either the EU or the United States), this sort of provision will normally be rejected by a serious distributor. Why would they do all the work necessary to get your product into China and to become well-known in China only to have you shut them down for any reason and with only three months notice?

5. When selling products in China, you need Chinese and English trademark protection for each product that will be sold. Serious distributors will insist that such protection is in place. Our China trademark lawyers can handle the appropriate China trademark registrations or you can have your distributor take care of this on your behalf as your agent. In either case, you should take care of the trademark registrations as soon as possible See China Trademarks: Register Yours BEFORE You Do ANYTHING Else. If your distributor takes care of this for you, you will want to ensure that the registrations are done in your name and not in theirs.

6. Your distribution agreement must be enforceable in the PRC. To make it enforceable we will draft it with Chinese law as the governing law, with the Chinese language as its controlling language, and with enforcement is in a Chinese court. For why we draft these contracts this way, check out China Contracts that Work and China Contracts: Make Them Enforceable Or Don’t Bother.

7. The confidentiality agreement you attach is not enforceable in China. See Why Your NDA is WORSE Than Nothing for China. Rather than draft a separate agreement, we will insert standard China NNN (non-use, no disclosure, non-circumvention) language into the main agreement.

8. The concepts of “hold harmless and indemnify” are pretty much foreign to the Chinese system and there is no effective commercial insurance program for this sort of coverage. We therefore normally provide a simple statement of the parties’ basic duties and liabilities. We normally provide that the distributor will be liable for damage caused to you by their actions in violation of the agreement. Since your proposed China distributor is a relatively small company you should assume it lacks the financial wherewithal to deal with a major claim and you should consider securing your own insurance.

9. I note that you are expecting your China distributor to do a fair amount of work prior before there will be a flow of products that will provide an income stream to your distributor to do that work. It appears you intend for your distributor to do this work at its own expense. In that regard:

a. Have you discussed this with your distributor? Have they agreed?

b. If you are expecting this preliminary work to be independent of the distributor achieving its sales milestones, the agreement should give you the right to terminate the contract if your distributor never does the preliminary work or does an inadequate job at it, solely in your discretion. You can do this by basing termination on your distributor’s failure to meet an early milestone or  by providing for a separate right to terminate. We should discuss.

 

For more on doing China distribution deals check out the following:

 

China sourcing contracts

China sourcing is complicated. And that’s talking strictly about the non-legal side of it. Our China lawyers who draft manufacturing contracts (typically NNN Agreements, Product Development Agreements and Contract Manufacturing Agreements) have seen enough mistakes to write a book. Well someone sort of just did. Renaud Anjouran, of Quality Inspection Blog, essentially just did, in his post, China Sourcing 101: the 15-Part Guide for New Buyers. He describes it as a “15-part series for new buyers who are starting to work with Chinese suppliers (and for more experienced people who want to double-check whether they are working in a smart way)” and it consists of the following 15 articles:

  1. Do You Need a Sourcing Agent?
  2. How to Identify Potential Suppliers?
  3. How to Verify a Manufacturer
  4. Second Choices vs. “Never Again”
  5. Negotiation: The Terms you Need to Discuss
  6. Keep Some Leverage with Suppliers
  7. Pre-Production: Describing What You Want
  8. Project Management of Your Orders
  9. Check Quality Early in the Manufacturing Cycle
  10. Always Verify Quality Before Shipment
  11. Build Good rapport with Suppliers
  12. How Closely Do You Follow Your Productions?
  13. The 5 Steps to Developing a Chinese Supplier
  14. How a Factory Can Improve Quality
  15. How a Factory Can Improve Productivity

If you want help in figuring out how to better source your product from China, I suggest you work your way through this series. And if you want help on the legal side, I suggest you read some or all of the following:

China Factory Problems: Always YOUR Fault?

How To Get Good Product From China; Specificity is THE Key To Your OEM Agreement.

China OEM Agreements. Ten Things To Consider

China OEM Agreements. Yet Another Reason To Have One

China Supply Agreements. Why The “Perfect” OEM Agreement Should Cost Less

OEM Agreements With Your China Supplier. Not Just For The Big Boys

China OEM Agreements. Why Ours Are In Chinese. Flat Out

The Five Steps To Successfully Buying Product From China.

China Manufacturing Agreements. Make Liquidated Damages Your Friend.

How To Get Bad Product From China With No Legal Recourse.

Any questions?

China IP lawyers and artificial intelligenceI have received a number of emails in response to my recent post on China’s artificial intelligence plan. Many who wrote me seek to reduce China’s plan to the following simple, three step process:

  • Catch up in AI by 2020.
  • Learn to make some basic products by 2025.
  • Lead the world by 2030.

This does not accurately summarize the plan, though it is how much of the English language media describe it. The full PRC AI plan is set out in 35 pages of dense, jargon heavy, Chinese bureaucratic prose. I will be doing a series of blog posts seeking to explain the full plan. My first post, China’s Artificial Intelligence Plan — Stage 1, dealt only with stage one, and as you can see from that post, stage one is not written as “catch up.” Stage one is a full-on plan to continue developing technologies with which Chinese companies are already working. I note also that manufacturing automation robotics is not featured. On the robotics side, the emphasis is on service robots.

Note also that the Chinese companies are already way ahead of this plan. They are not waiting around for guidance from the government on their AI projects; they are moving ahead full speed. In general, Chinese companies are succeeding most with the software/network based applications of AI. This is the focus of the Baidu research center in Silicon Valley. They are not doing as well with mechanical devices such as robotics and smart vehicles and sensor based IoT devices. However, they know that and they are making strong efforts to advances in these areas. We touch on this a bit in China IP Challenges for Automotive Suppliers. One of the areas on which many Chinese companies are focusing is on human/AI interaction and they are having good success with that in the field of medical imaging and diagnosis.

There is little doubt that part of China’s AI strategy involves acquiring technology and then selling in back into the developed market from which it came. This has been and still is the strategy of businesses in pretty much every developing country. The U.S. followed this approach during the entire 19th and early 20th centuries. Japan and Korea and Taiwan did it with great success in the post WWII era. China and India are now moving into that phase. That is how technical progress is made and we write about to guard against this sort of IP appropriation nearly every week. See How To Give Away Your IP In China, How to Give Away Your IP in China Without Realizing It and China and the Internet of Things and How to Destroy Your Own Company.

The real question is whether this strategy will work in the AI era  In general, Chinese companies are not good at working on their own to appropriate foreign technology. They prefer to enter into a manufacturing or joint venture arrangement where they convince the foreign entity to teach them how to use the technology. See China Joint Ventures: Keeping Your Friends Close and Your IP Closer. Then, later, they appropriate the technology and sell the cheaper product back into the same market. This is what Chinese companies did with high speed rail and with the Russian designed fighter jet and this is what they are trying to do it now with commercial aircraft. They will undoubtedly seek to do the same thing with AI and robotics. See China-US Trade Wars and the IP Elephant in the Room.

Will China succeed it purloining AI IP? It depends on a couple of factors. First, if the technology is protected by patent and copyright and trade secrecy, then they cannot sell into the markets where those IP protections exist. This would mean that North America and the EU would be closed to them, at least during the period where the IP protections are in place. Second, can Chinese companies master the technology to point where they can really compete? Normally, the Chinese companies simply clone the product and then seek to compete solely on the basis of price. For some products, this works. For more sophisticated IoT, AI, “smart” products, the success rate of the Chinese companies has been low. How many U.S. consumers get excited about the purchase of a Lenovo computer or a Xiaomi cell phone? How many U.S. customers are interested in buying PRC knock offs of virtual reality headsets? Not many. Price is not the significant issue for these more technically sophisticated products. When Chinese companies cannot compete on price, they traditionally don’t know what to do. There are many programs in place in China focused on changing this “price is the only issue” mindset. So far, progress has been sporadic at best.

However, without regard to whether China can succeed with its AI program, it is clear that appropriating foreign AI technology is the goal of most Chinese companies operating in this sector. For that reason, foreign entities that work with Chinese companies need to be aware of the significant risk and take the necessary steps to protect themselves. There are many ways to do this, using a mix of IP registrations and carefully drafted agreements. See China Contracts: Make Them Enforceable or Don’t Bother. This is what the China lawyers at my firm focus on and this is the issue we discuss most often on this blog. Stay tuned.