China lawyers

One of our China lawyers recently got an email from a friend/former client who spent more than a decade as the China point person for his company. The email asked whether it still makes sense for American companies even to try to do business in China:

Former Client. I would guess that my China company experience is limited compared to your experience but for us maybe 25-40% of the companies we attempted to work with in China were “good.” The rest were simply working to take advantage of us and once they figured out we were not just going to roll over in ignorance they just stopped engaging.  So though they did not have the opportunity to completely rip us off like some of the companies you describe in your blog, we wasted large chunks of our time and effort on them. And even after we figured out the companies it made sense to work with, we usually had to spend large amounts of time and money to get them to agree to the sort of contracts that would work for us.

This is why I wonder if small US based companies can successfully do business in China. Does it still make sense for them even to try when so much time is required to eliminate the large number of bad/dishonest companies?

My Answer. Typical lawyers response: It depends. But it does, right? It depends on how important China is or can be to your business. What is interesting and telling about this person’s email is that his complaint is not that his company got ripped off or that the contracts did not work, but that they took so long and cost so much. I think that is the key point here and to a certain extent it means the risks of doing business with China are not as great as so many believe. If you spend the time and the money, your risks go way down. So to grossly oversimplify, all you need to do is compare the cost of being safe against the benefits of doing business in China to get to your answer as to whether it makes sense to do business in China.

Your thoughts?

China U.S. investment lawyersThe era of large scale “take over” type Chinese investment in U.S. companies appears to be over. However, our China lawyers still seeing a lot of interest in smaller investments from China in U.S. companies involved in emerging technologies. Though it is possible this investment interest from the Chinese side is completely legitimate, just over half the time, that is not what we are seeing. What we usually see is what our China attorneys have taken to calling the “free look investment scheme.”

The free look investment scheme usually applies to when the Chinese company or individual that purports to want to invest in a U.S. company but actually has no interest in a long term investment. Instead, what the Chinese side is seeking is a “free look” The goal of the Chinese side is to investigate the American company’s innovative technology and then appropriate that technology for its own use. The Chinese side uses the promise of investment and financing to convince the U.S. side to drop its guard. The Chinese side then takes what it wants and disappears when it is time to make the full investment.

Our firm is seeing these free look investment schemes virtually every week and we are seeing these schemes become more refined. The result is always the same: no investment from the Chinese side and lost time, money and confidential information from the U.S. side. Though losing confidential information is always a disaster, the lost time and money is oftentimes even more damaging for smaller U.S. target companies, particularly for start-ups that cannot afford to wait around for magic.

The free look investment scheme is usually organized in one of the following three ways:

Free Look Investment Scheme Number One: This scheme is normally limited to smaller but established U.S. companies. The Chinese side proposes to make a substantial investment in the U.S. target company. The amount to be purchased is either a controlling interest in the stock of the target company or substantially all of the stock in the target.

The Chinese side enters into a stock subscription agreement to purchase the stock, but insists on performing extensive due diligence before making the purchase. During the due diligence period, the Chinese investor works to obtain as much confidential information about the operations of the U.S. target company as possible. Often, the proposed closing date is extended several times as the Chinese side seeks more and more sensitive information. The U.S. side provides the information, believing that since the Chinese side will eventually own the company, it cannot hurt to provide them with what would otherwise be considered information that should not be disclosed. But in the end, when the closing date arrives, the Chinese side announces the deal cannot close because the Chinese government will not allow for payment to be made from China. The Chinese side then argues that it cannot be held liable for breaching the subscription agreement because the actions of the Chinese government constitute force majeure and therefore frees them from having to close on the deal. In some cases, the Chinese side will have paid a modest initial deposit or down payment. In those situations, the Chinese side will then argue that the American company must refund its deposit due to its force majeure defense. If the deposit is not refunded, many Chinese investors will file suit demanding the refund. Litigation is always expensive, and that is even more true of this sort of complicated cross-border type of litigation.

Free Look Investment Scheme Number Two: The Chinese side proposes to invest in a U.S. company. The focus of the investment is not the U.S. company itself, but rather the technology either currently owned by the U.S. target company or (more often) the technology the U.S. target company is developing. The Chinese side offers to make a substantial investment in the U.S. company, but conditions its investment in one of two ways: First, the U.S. target must prove to the the Chinese side that its technology is commercially viable. Second, the U.S. target company must enter into a China Joint Venture with the Chinese investor to develop and market the technology in China.

Normally this scheme is structured as follows:

a. Minimal initial investment amount.

b. Payment of the remaining investment amount will be in a series of small installments, often five or more.

c. The China Joint Venture business structure is presented in a way that appears very attractive to the U.S. target company, but this attractive structure is not permitted under Chinese law. The usual “bait” is either i) no financial investment from the U.S. side in exchange for the U.S. company getting a large percentage ownership interest in the China Joint Venture and b) the false promise of an early IPO on one of China’s public markets.

What then actually happens is the following:

a. The Chinese side delays making the initial payment and then delays making each installment. The Chinese side then presses for more and more confidential information, even though it has not made the required payments.

b. At some point in the process, the Chinese side decides it has obtained enough information and it then defaults on its remaining payments. In the old days, that would be the end of it. More recently, the Chinese side has become bolder and will file a lawsuit seeking a refund of its initial (and any subsequent) payments, usually by alleging some breach by the American side.

c. The China Joint Venture never comes into existence because i) the Chinese side never planned to do it and b) the business/ownership/control terms do not comply with Chinese law in any event. But during the bogus formation process, the Chinese side will use the prospect of future cooperation in the China joint venture to extract more information from the U.S. target. The American side thinks it is working with the Chinese side on the joint venture when in reality they are working at cross-purposes.

Free Look Investment Scheme Number 3: The Chinese side offers to “invest” in the U.S. entity by providing working capital and by helping create a market for the product in China by acting as the PRC distributor. The Chinese side offers to provide a working capital line of credit and to enter into a PRC distribution agreement. Both are offered on extremely attractive terms, which is the bait for entering into the relationship.

As with the previous two free look investment schemes, the Chinese side conditions its “investment” on completing its due diligence concerning the product or technology owned by the U.S. target. And just as is true with the first two schemes, what the Chinese side really wants is access to confidential information it can then use for its own purposes. Once that purpose is achieved, the Chinese side bails.

This free look investment scheme usually works as follows:

a. The Chinese side will work hard to obtain the desired confidential information before providing any financing or entering into any form of distribution agreement.

b. If the Chinese side is forced to provide financing, it will structure it in such a to allow it to walk away from the financing at will. The Chinese will normally structure the financing as a monthly line of credit payments based on an informal agreement. A formal financing document is not used. Virtually no Chinese company or individual has U.S. dollars in the U.S. available for providing a monthly financing payment. The cash must be sent from China and this payment must be converted from RMB to dollars. The conversion is subject to approval by the Chinese government and the local foreign exchange bank. When the Chinese side decides it is time to default on its financing obligation it simply states that payment from China is no longer approved. They then use this denial/alleged denial by the Chinese government to claim they are no longer obligated to pay, using the familiar force majeure argument discussed above.

c. The standard procedure for the distribution agreement is as follows:

i. Endless delay in drafting even a first draft of the agreement.

ii. The attractive terms disappear, to be replaced by commercially unreasonable terms. Typical of this is that all profits on sales are earned in China, while the U.S. entity sells at cost to China and earns nothing.

iii. In the end, the Chinese side never orders any products.

As you would expect, all three of these free look investment schemes can be very damaging to U.S. companies. If you are confronted with one of these schemes, you have two ways to proceed. One, just walk away. Two, if you decide to move forward draft the terms of your deal in a way that is both commercially reasonable and that protects your company from the damage that results from the free look.

In my next series of posts, I will describe some of the ways our China lawyers work to render harmless the standard free look schemes. Note, however, that Chinese companies construct these free look schemes intentionally. They are not done by accident or because the Chinese side is inexperienced with the U.S. investment market.

China employment lawyers
China vacation rules

Chinese employment laws require all China employers provide their employees with annual paid leave based on the employee’s total years of service. Employees who have worked more than a year but less than 10 years get 5 days annual leave, employees who have worked between 10 and 20 years get 10 days, and employees with more than 20 years get 15 days. This annual leave schedule applies to all employees, both Chinese and non-Chinese.

The Regulation on Annual Paid Leave for Employees, makes clear that employers are legally obligated to ensure their employees take their annual paid vacation time. This is enforced by requiring employers pay their employees an additional 200% of normal wages for each unused vacation day.

A question our China employment lawyers often get from foreign companies with China-based employees is what happens with required annual paid leave when an employee submits his or her notice of resignation? Must the employer pay the additional 200% of normal wages for each unused vacation day or can it require the soon-to-depart employee take any unused vacation days before leaving for good? Somewhat surprisingly, most locales in China allow employers to require the departing employee take any unused vacations during the resignation notice period (which is usually 30 days).

However, the best way to proceed (and the safest for the employer) is to make sure (beforehand!) that your employer rules and regulations and/or your employment contracts include language making clear that you as the employer can require resigning employees to use up any accrued and unused vacation days during their applicable resignation notice period. Like pretty much everything else having to do with Chinese employment laws, it is nearly always easier/safer to be clear in your employment documents (like your rules and regulations and your employment contracts) so that you do not have to rely on the whims of your local labor bureau or court.

What though should you do about an employee who leaves your company with accrued vacation time but gives you no prior notice of their resignation? It depends on where you are located in China, but in many places such as Shanghai, the employer will not have to pay the employee for unused vacation days. This is because it is the employee who made it impossible for the employer to make any arrangements and it would not be fair to punish the employer for the employee’s unreasonable behavior.

A couple of “quick” things about China employee vacation days. The burden is on you as the employer to keep close track of whether your employees take their vacation days. The best way to stay on top of things is to have your employees use up all of their vacation days each year and for you to document this accordingly. If an employee gives up certain annual paid leave for her own reasons, you should be sure to have that employee sign a document making clear that he or she did so voluntarily. This won’t necessarily work but it is at least something. It also helps to have your employer rules and regulations and your employee contracts written so as to be easy for both your employees and your management to understand. This often means it should be in well-written English for your management and in well-written Chinese for your employees and for the China labor bureau and the courts.

 

 

China cyber lawyers cyberlawMany international companies that operate in China have Chinese websites and some kind of network system, whether for selling their own products or solely for internal use. In many cases, these websites and internal systems are hosted on servers outside China. I and the other lawyers on our China cyberlaw team are frequently asked whether a company that collects personal information within China must store that information within China.

The short answer is yes.

China’s Cybersecurity law took effect last year and it requires critical information infrastructure operators (CIIOs) to store personal information and important data collected and generated within the territory of the PRC. Whether a network operator is a CIIO typically depends on its industry and on how much a data breach would harm the public interest. Network operators in industries like public communication and information service providers, energy, finance, and public services are more likely to be considered CIIOs.

China is also in the process of establishing rules for cross-border transmitting of personal information and important data via draft Measures for Security Assessment of Cross-border Transfer of Personal Information and Important Data (个人信息和重要数据出境安全评估办法, the Measures) and draft Guidelines for Data Cross-Border Transfer Security Assessment (数据出境安全评估指南, the Guidelines). Under the existing drafts, the Measures and the Guidelines will apply to any company that is a network operator engaged in “domestic operation.”

The term “network operator” is defined to include any person or entity that owns and manages any network and also network service providers. If a company uses its internal network for its internal company operations and uses its company website to provide information to its customers and this system and website are owned and managed by its foreign parent, the foreign parent company is a network operator.

Under the Guidelines, domestic operation means providing products or services within China. A foreign network operator that is not registered in China but provides products or services to customers in China is engaged in domestic operation and will be subject to China’s cross-border data transfer requirements.

The Guidelines also set forth how to determine whether a foreign company is engaged in domestic operation. The factors that will lead to such a finding include using the Chinese language, settling payments with RMB, and delivering or distributing products or services to China citizens or companies. If one or more of these exist, a foreign company will be deemed to be engaging in “domestic operation” and therefore will be required to conduct a security assessment before engaging in any cross-border transfer of personal information and important data. But a network operator located in China that provides only products or services to foreign entities and whose operation does not involve any personal information of Chinese citizens or important data will not be considered to be a domestic operation and therefore will not be subject to China’s cross-border data transfer rules.

China Cross-Border Data Transfer Requirements.

Non-CIIO network operators may transmit personal information to a server located outside China so long as the subject of the relevant data has consented to such transmission and so long as the entity (usually a company) that initiates the transfer has undergone a security assessment regarding its data transfers. These requirements are laid out in the Measures and the Guidelines.  The company should conduct the security assessment, either by itself or engaging a third-party professional service provider.  Report of such assessment shall be kept for at least two years. In certain circumstances, the relevant industry regulator will review the assessment.  

Under Article 7 of the second draft of the Draft Measures, the relevant regulatory authority will conduct when the data transfer involves any of the following:

  1. Data containing or accumulatively containing personal information of more than 500,000 individuals
  2. Data related to nuclear facilities, chemical biology, national defense, or military, population and healthcare
  3. Data related to large-scale engineering activities, the marine environment, or sensitive geographical information
  4. Data related to the cybersecurity information of key information infrastructure, such as system vulnerabilities and security protection measures
  5. Other factors that may potentially affect China’s national security and public interests
  • The Required Consent

To transfer personal information outside China, a network operator must first obtain consent from the subject of the personal information. This consent must either be in writing or by some other sort of affirmative action by the subject of the data. Consent can be achieved by, for example, an online pop-up notification asking the data subject to click yes or no, or by sending a text message to the data subject requiring a “yes” or “no” reply to the cross-border transfer.

Consent can be implied in certain circumstances, such as making international calls, sending an email internationally, international instant messaging, and conducting cross-border transactions via the Internet.

  • The Required Data Security Assessment

The Measures require the company transmitting personal information and important data outside China to conduct (or use a third party to conduct) a security assessment of the cross-border data transfer system it will use to send the personal information and important data. Industry regulators or regulatory authorities will be responsible for monitoring these assessments and they shall do their own cross-border data inspections “regularly.” According to the Guidelines, when there are multiple entities involved in an outbound data transmission, the entity that initiates the transmission shall conduct the security assessment.

Only one security assessment is needed for “continuous” cross-border transmissions. If two separate data transfers occur within a year and the purpose and recipient of both transfers are the same, and the scope, type, and quantity of information are similar, these transmissions will be considered “continuous.” Take for example, a Chinese subsidiary of a foreign retailer that collects its customers’ personal information on any initial order and then transmits that information to its foreign parent company. This sort of transmission may happen instantly many times every day with the receiver, scope and type of information remaining the same. These transmissions would likely be considered continuous and therefore not require a separate security assessment for each single transfer.

In my next post I will provide more on the nuts and bolts of what foreign companies that are doing business in China need to do to comply with China’s cybersecurity and internet privacy laws.

Doing business in ChinaGot a great email today from a China lawyer friend. The email noted how a blog post we did more than ten years ago, entitled, China’s Five Surprises, was so incredibly prescient in predicting China business today. It truly was, but as I noted in my response to my friend, the credit should go to Dr. Edward Tse, the person who observed and wrote about China’s five surprises. We merely reprised them and agreed with them.

It is though amazing to me how accurate Dr. Tse was with his observations/predictions.

Here is what we wrote about the five China surprises way back in 2006:

This paper does an excellent job discussing where China business is today and where we can expect it to be in the future. Its five main themes are as follows:

1.  Many Chinese companies are already more than simply low cost competitors and even more of them will compete on quality in the future.

2.  We should expect Chinese companies to become more innovative over time.

3.  China has been able to draw top people from around the world, accelerating business competence.

4.  “Out from Guanxi.” Guanxi is overrated and rapidly declining. “High-quality management and transparent governance structures count more.”

5.  Chinese companies are going overseas.

Our own experiences cause us to agree with all five of these themes and we have already discussed some of these on our blog, here, here, here and here.  No controversial stand here, but we also agree with Dr. Tse that neither the “China will take over the world” nor the “China will crash and burn” scenarios reflect the reality on the ground in China.

I hardly need mention that all five of these things came true.

  1.  Chinese companies are today fierce competitors and not just because of cost. See Your China Factory as your Toughest Competitor. 
  2. Many Chinese companies have become more innovative. See Can China Innovate?
  3. China has been able to draw top people from around the world.
  4. Guinxi has become far far less important today in China (in most industries) than ten years ago. As one indicator, we mentioned guanxi an average of ten times a year from 2006 to 2014, but only four times a year since then.
  5. Chinese companies are going overseas. True, but. This has definitely happened but not without its starts and stops.

What are you seeing out there that is telling you what China business will be like ten years from today?

China employment lawyersIn late 2017 an old and yet important set of China Employment laws —the Measures for Severance Payment due to Violation or Termination of Employment Contracts — issued by the then-Ministry of Labor back in 1995 was abolished by the PRC Ministry of Human Resources and Social Security. Since our China employment lawyers keep getting questions regarding the impact of this change I am writing this post to provide some clarification.

The short answer is that there are no significant changes. The fundamentals of China’s employment laws have not changed. China is still NOT an employment at will jurisdiction and its employment laws remain very local. 

The old Measures provided guidance on how to calculate statutory severance. They had some special rules for calculating severance payments, including (1) how a 12-month cap on severance would apply to mutual terminations or terminations for incompetence, (2) how severance was to be calculated using the average monthly wage for the 12 months prior to termination under “normal productions conditions,” and (3) how to calculate severance for employees terminated after various leaves of absence, for employees with contracts that can no longer be performed due to major changes surrounding execution of the employment contract, and for mass layoffs.

Before these Measures were abolished, many Chinese arbitrators and judges held that they had already been partially annulled because they conflicted with the China’s Employment Contract Law, but the legal outcomes on this issue were inconsistent.

When China’s Employment Contract Law took effect on January 1, 2008, it made clear that for terminated employment contracts severance payments under Article 46 of this Law shall be calculated based on the number of years of employment from the implementation date of this Law. The basic rule under the Employment Contract Law is that for each year (which is any period longer than 6 months) an employee has worked for the employer, he or she is entitled to one month’s wages in severance. For any period of employment of less than 6 months, the employee is entitled to half a month’s wages. If an employee’s monthly wage exceeds 300% of the local average monthly wage for the preceding year, the local average can be used to calculate the severance payment. In this situation, the number of years of service used to calculate statutory severance is capped at 12 years.

But the Employment Contract Law left open how to deal with an employee whose employment started before January 1, 2008. Before the mentioned Measures were annulled they were still technically in effect and this created several different methods for calculating severance. Subject to varying local employment laws, the specific method depended on: (1) the employee’s years of service with the particular employer; (2) how much time the employee put in working for the particular employer before January 1, 2008; (3) the employee’s average monthly wage during the 12 months before the employment contract ended or was terminated; and (4) the basis on which the employment relationship terminated or ended.

Not much has changed with the annulment of the Measures, though as is pretty much always the case with China’s employment laws, many of the specific changes (and lack of changes) will vary depending on the locale in which the employer is located.

Suppose the Measures were still effective and the employer’s locale does not have different local rules. An employee who worked for her employer since June 1, 1995 is terminated pursuant to a mutual termination agreement signed on January 1, 2018, According to China’s employment laws, the employee must receive severance. How do you calculate this employee’s severance if her average monthly wage during the 12 months prior to termination was greater than 300% of the local average monthly wage for the preceding year? If you apply the rules within the Measures, you would divide it into 2 periods in calculating the severance: (1) for the period before January 1, 2008, at her average monthly wage during the 12 months prior to the termination multiplied by 12 (because it would be subject to a 12-month cap); and (2) for the period after January 1, 2008, the severance would be 300% of the local average monthly wage for the preceding year multiplied by 10.

After annulment of these Measures the severance calculations under the above scenario do not change much. You still must divide it into 2 periods. Period one is the period before January 1, 2008 and her severance for that period would be calculated using her average monthly wage during the 12 months prior to her termination, multiplied by 13 (since the 12 month cap no longer applies); for period two, the period from January 1, 2008, her severance would be 300% of the local average monthly wage for the preceding year multiplied by 10. As you can see, in this scenario, the annulment of the Measures will increase the employee’s severance by 1 month at the average monthly wage during the 12 months prior to termination.

So at the end of the day, the most important factors for calculating severance payments are still how much the employee made during the 12 months prior to termination and when the employee started working for the employer. And of course, what your local employment rules say as well.

But whenever our China employment lawyers deal with China employment severance situations, our advise is usually not to get too bogged down with the severance amount because by far the most important thing is to make sure your termination is lawful. If you lack a legal basis (again, both under China’s national employment laws and under the local laws that apply to your specific business) for the termination there is little point in spending time calculating whether you have applied all the applicable severance caps.

And it is in the termination itself where our China employment lawyers most often see the big mistakes. Far too often foreign companies doing business in China terminate employees without a legal basis to do so. The easiest and safest way to terminate a China-based employee will almost always be via a mutual termination, using the minimum statutory severance as a starting point in your settlement discussions with your departing employee. When dealing with a mutual termination situation, paying the employee more than the minimum statutory severance does not invalidate the mutual termination agreement and doing so often makes sense as a way to secure a fast and relatively amicable resolution.

China Manufacturing ContractsAs China and its laws change, the China lawyers at my firm must constantly adjust, usually just ever so slightly. This adjustment can include even how we draft our contracts for China. And oftentimes, with even small changes in how we draft our contracts, we make changes in the questions we ask to gather the information we need to draft a contract that suits both their situation and their goals.

The following is the initial email questionnaire our China manufacturing lawyers are currently using with companies looking to engage in OEM manufacturing in China. Our lawyers send this out and then review the responses, all as a prelude to drafting the  Manufacturing Agreement

 

 

The below is fairly comprehensive, but feel free to provide any additional information that you feel may be relevant. Please answer as much of the below as you can and to the extent any of our questions are irrelevant, please feel free to write N/A, but to the extent it might make sense for you to explain to us why something does not apply to you. Please do so. We will likely have followup questions depending on your responses to the below.

Note that the agreement we will be drafting for you will be intended for use within mainland China with manufacturers based in mainland China. It is not intended to be used with sourcing agents, nor is it intended for use in Hong Kong, Macau, Taiwan, or any other country or administrative region outside China.

1. Basic Information

  1. For each entity that will be executing the agreement, please supply the full legal name, address, phone number, fax number, and URL, as well as the name, title, and email address of the representative who will be signing on behalf of that entity. (In both Chinese and English, as relevant.)
  2. Please identify the state in which your company is incorporated.
  3. Will you be using this OEM agreement only with this specific manufacturer, or are you hoping to be able to reuse it with other manufacturers?
  4. Please provide a copy of your Chinese counter-party’s business license.
  5. To the extent multiple entities will be involved in this agreement on the Chinese side, please identify each of these entities and describe their corporate structure. For instance, many OEM contracts involve one Chinese company that owns a factory and performs all manufacturing and a second company (usually based in Hong Kong) that issues invoices and receives payment.

2. Design Basics

  1. Do you anticipate the Chinese side will be performing any design work or customization as part of the manufacturing process?
  2. If not, are you ordering “off the shelf” products the Chinese side already manufacturers?
  3. If so, have you already entered into a design services agreement? What arrangements have you made regarding ownership of the designs, payment for the designs, milestones, and ordering obligations?

3. Manufacturing Basics

  1. Please describe each product the Chinese side will be manufacturing. Do you anticipate these products will change over time?
  2. What sort of volume are you expecting? Will the volume change over time? Have you have agreed to order a minimum number of products? If so, please provide details.
  3. Do you wish to prohibit subcontracting? Are you aware of any third parties that will be involved in manufacturing, packaging, or shipping your product? This includes any entities that may be owned by or otherwise affiliated with the Chinese contract party.

4. Pricing

  1. Have you determined the prices for the products yet? If so, please include the relevant details.
  2. How will pricing and related terms be negotiated? On a purchase order basis? On an annual basis? Some other way?
  3. Have you negotiated the payment terms? For instance, will you pay by letter of credit? By installments? If by installments, what are the amounts/percentages of those installments, and when are they due?

5. Purchase Orders, Shipments, and Inspections

  1. Do you have an existing purchase order you intend to use for your product orders from these manufacturer(s)? If so, please provide us with a copy.
  2. After receiving a purchase order, how long does the manufacturer have to accept or reject it?
  3. If you submit a purchase order and it is not accepted by the Chinese side, what happens? In other words, is the Chinese side bound for some period to make a certain amount of product at a certain price or only obligated to make product for you after it accepts your purchase order?
  4. What have you negotiated regarding shipping terms? For instance, how long after acceptance of a purchase order will goods be shipped? Will you be using a freight forwarder? From and to which ports will the goods be shipped? Will the goods be shipped FOB or CIF or something else?
  5. What arrangements will be made for packaging prior to shipment?
  6. When your products are shipped from China, what brand names, logos, and/or slogans will appear on the products and packaging? Please distinguish if possible between words and graphic logos.
  7. Where do you anticipate selling your products? In particular, will you be selling them in China?
  8. If you are selling any product in China, what brand names, logos, and/or slogans will appear on the product and on its packaging?
  9. Will any product you manufacture in China have a Chinese name? Does your company have a Chinese name? If so, please provide them.
  10. What sort of arrangements have you made for inspection and quality control during the manufacturing and packaging process (i.e., pre-shipment)? Exactly what should be done with any defective product discovered during the manufacturing process?
  11. What sort of arrangements have you made for inspection and quality control upon receipt (i.e., post-shipment)? Exactly what should be done with any defective product discovered then?

6. IP and other concerns

  1. What are your main concerns in this deal? Are you concerned with ensuring high product quality? Receiving products within the agreed-upon time?  Protecting your intellectual property (i.e., ensuring the Chinese manufacturer does not sell your product behind your back and/or steal your designs)? Pricing?
  2. Do you have any trademark registrations in China or anywhere else in the world (pending or otherwise)? If yes, please list them.
  3. Do you have any patent or copyright registrations in China or anywhere else in the world (pending or otherwise)? If yes, please lis them.
  4. Do you have a list of customers, suppliers, or other third parties you want to prevent the Chinese party from contacting

7. Tooling and Molds

  1. Will the Chinese manufacturer be using any tooling or custom molds to make your products?
  2. If so, does the manufacturer already have all of the tooling in question? Which party owns the tooling?

8. Warranty

  1. What sort of warranty terms have you negotiated or do you expect?

9. Term

  1. Have you determined the length of time this deal will be in place?

10. Other issues

  1. Has the Chinese manufacturer already signed any sort of term sheet, memorandum of understanding, letter of intent, or other document, even if only in English? If so, please provide this document.
  2. Have you previously purchased any products from this manufacturer? If so, please provide an example of the purchase order used.
  3. Are there any unresolved issues involving any previous manufacturers? For instance: have you gotten all of the tooling back from any previous factories? Are there any outstanding invoices or payments due?

China employment lawyerOn May 16 (at 1 p.m. Eastern, 10 a.m. Pacific and 5:00 pm. Greenwich Mean Time) Grace Yang, our lead China employment lawyer, will be putting on a webinar with HRWebAdvisor. Grace’s talk will last about 90 minutes and will run the gamut on China’s employment laws, with a particular focus on what foreign companies with China employees need to do not to run afoul of the myriad and complicated national and local employment laws. HRWebAdvisor describes Grace’s talk as follows:

China’s employment laws are complicated and highly local. Foreign companies doing business in China face complex China labor and employment issues and questions every day – often without even realizing it. What works in the United States has very little in common with what works in China. Employment compliance has become one of the most important issues foreign companies face in China and it is the rare foreign company that gets it right. Employee disputes are becoming considerably more common and government enforcement is getting significantly more stringent. It virtually always costs less for your company to deal proactively with China employment law issues than to wait to address them only after they have come via a dispute. As such, it is imperative that you understand the framework of Chinese employment law and steps you can take to mitigate risk.

Please join Grace Yang as she helps you better understand the Chinese employment law landscape. She will focus on helping you recognize key China employment issues and give you guidance on how to solve real-life China employment law issues and problems.

WHAT YOU’LL LEARN

This webinar will cover the following:

  • The basics of China’s employment law rules
  • How to draft an employment agreement that works for your China locale
  • How to draft China employer rules and regulations (aka employee handbooks)
  • The other agreements you should consider for your China employees
  • Frequently contested issues, such as overtime, vacation days, commission payments, and leaves of absence
  • Employee terminations
  • HR audits AND MUCH MORE!

YOUR CONFERENCE LEADER

Your conference leader for “Chinese Employment Law Landscape: Key Issues and Staying Compliant in the Local Market” is Grace Yang. Grace heads Harris Bricken’s China employment law practice and contributes a weekly column about China employment law issues for the multi-award winning China Law Blog. Grace received her B.A. degree in law from Peking University and her J.D. degree from the University of Washington School of Law. She represents both China employers and employees in their China employment law matters. Grace published a book entitled The China Employment Law Guide.

Don’t miss it. To sign up for the live or recorded webinar, go here.

China IP lawyersOn an almost weekly basis, our China IP lawyers field inquiries from foreign companies that have discovered their Chinese manufacturer has registered one or more of their trademarks. The Chinese manufacturer’s rationale for registering these marks ranges from the altruistic (to prevent trademark squatters from doing so first) to the malevolent (to sell counterfeit goods in China), but usually falls somewhere in between The manufacturer always claims its intentions were pure as the driven snow, but this explanation is hard to accept when, as is almost always the case, the manufacturer never told the foreign company what they were doing. Deep down, the manufacturer knows that owning the trademarks gives it leverage in future negotiations.

The best manufacturers operate with full transparency: they ask their foreign company clients if they have already filed for trademarks in China, and if they haven’t, they explain the importance of doing so as soon as possible. See 8 Reasons to Register Your Trademarks in China. If the foreign company then says it can’t or won’t file trademark applications in China, then—and only then—will the manufacturers file trademark applications for the brand owner’s marks, and with the clear understanding that it will assign ownership of the marks to the foreign company upon registration. But again, this almost never happens.

Back to the usual case of manufacturers filing trademark applications unbeknownst to its foreign company client. Once the Chinese manufacturer has been found out, many will claim that they are legally or logistically prevented from transferring ownership of the registrations to the foreign company. We have heard many excuses, including the following:

  1. Only Chinese entities can own a Chinese trademark.
  2. The only way to transfer ownership of a Chinese trademark is for the manufacturer to abandon the mark and then for the foreign company to file a new application, but this is dangerous because third parties might file an application in the time in between.
  3. It is not possible to transfer ownership of a trademark application that is under examination.
  4. In order to assign a trademark, each party must submit a Certificate of Good Standing or a business license that has either been issued by the Chinese government or authenticated by the Chinese Embassy, and the latter process will take several weeks.

Full points for creativity, but none of the above is correct.

  1. Foreign entities can own Chinese trademarks. In fact, foreign companies own millions of Chinese trademarks.
  2. The way to transfer ownership of a Chinese trademark is by filing an assignment statement with the Chinese Trademark Office. It is possible to “transfer” ownership by abandoning a mark and then having a third party file a separate application, but that is costly, inefficient, and risky.
  3. It is possible to transfer ownership of a trademark application that is under examination. That said, if the trademark is ultimately rejected, then the new trademark owner will not own anything at all.
  4. You do need to submit proof of both the assignor’s and assignee’s identities, but nothing needs to be authenticated. The documents required should be readily accessible.

When you find out that your Chinese manufacturer has registered your trademarks, you may need to negotiate the terms under which they will assign the marks to you – and that may take some time. But the actual assignment process is easy and relatively inexpensive and don’t believe anyone who tells you otherwise.

China AttorneysOne of the things my firm’s China lawyers are always saying and seeing is how China is constantly getting more legalistic, especially with foreign companies doing business in China. I used to believe this would lead foreign companies to become more careful, but this has not happened. Too many foreign companies — for all sorts of different reasons — remain far too nonchalant and increasing legalization only increases the likelihood this attitude will eventually harm them. In this series of posts (of which this is the first), I will write about the most common incidents our China attorneys see involving foreign companies that get into trouble in China for being careless or sloppy or just too trusting.

As for the title of this post, I have been studying Spanish for the last six months or so and oftentimes when I give a wrong answer my teacher will ask “¿Estás Seguro?” which means “are you sure?” I always respond by saying, “no, porque….” because I know she would not be asking this question if my answer were 100 percent accurate. I am asking the same question regarding China company formations because we far too often see instances where a foreign company believes one thing but the reality is something else entirely.

Forming a China company is a prime example of this, both with WFOEs and Joint Ventures. What usually causes the problem to bubble to the surface is different as between a WFOE and a Joint Venture, but what caused the problem in the first place is nearly always the same: the foreign company trusted without verifying.

The WFOE Problem. The WFOE problem is a somewhat simple one. The foreign company believes it has formed a WFOE in China (oftentimes long ago) and that it is now operating completely legally there. The foreign company typically then has a problem with its most important China “employee” and it wants to terminate that employee. The first thing our China employment lawyers usually do in this situation is to look at the official Chinese government corporate records for the WFO so as to get a better handle on the employee’s authority at the company. Sometimes we discover there is no WFOE.

At this point, the legal issue is no longer terminating an employee of a WFOE; it’s figuring out what makes sense in light of a messed-up China situation and a company’s present-day China goals. You cannot terminate an employee from a company that does not exist.

How does a company get to this point? What leads a company to believe it had a China WFOE when it didn’t? Ninety percent of the time the fatal mistake was trusting the person the company now wishes to terminate. That person claimed to have formed a WFOE for the foreign company but never did. Maybe he or she (though in my recollection it’s always been a he) formed a Chinese domestic corporation he owns. Or maybe this person never formed any Chinese entity at all. In any event, the foreign company  paid money to this person believing this money would be used to form a WFOE. Virtually always, the company then paid more money to this person believing this money would go to pay rent and personnel and taxes and other business expenses. Probably some of the money went to these things, but it is likely a good chunk of it went straight into the pockets of the person who lied about having formed the WFOE. Not sure why, the companies in this circumstance seem to be disproportionately Northern European. Just putting that out there.

The Joint Venture Problem. This is really two different problems. One, the non-existent Joint Venture, which is very similar to the WFOE problem, but usually a bit more complicated. The putative JV partner is put in charge of forming a China Joint Venture and it either does never forms any company at all or it forms a company in Hong Kong (or even in the United States, believe it or not!) that the foreign company believes to be a China Joint Venture. The foreign company thinks that the Hong Kong or US company owns a company in China and it thinks this corporate structure is itself a China Joint Venture. It isn’t and the China entity into which the foreign company ends up pouring time and money and technology is not in any respect owned by the foreign company. The foreign company then at some point becomes concerned about never having received any money from its Joint Venture and now the Joint Venture has gone completely silent and is not even responding to emails or the Joint Venture is now successfully competing directly with the foreign company. See China Scam Week, Part 6: The Fake Joint Venture.

Two, the foreign company trusted its Chinese Joint Venture partner and the lawyer its Chinese Joint Venture partner chose to prepare the necessary Joint Venture documents. Now there is a problem and those documents were written in such a way as to favor the Chinese side so completely there is nothing the foreign company can do to resolve it. See China Joint Ventures: The Tide is Out.

Do you have a Chinese company? ¿Estás Seguro?  Maybe you should double-check.