China AttorneysBecause of this blog, our China lawyers get a fairly steady stream of China law questions from readers, mostly via emails but occasionally via blog comments as well. If we were to conduct research on all the questions we get asked and then comprehensively answer them, we would become overwhelmed. So what we usually do is provide a super fast general answer and, when it is easy to do so, a link or two to a blog post that may provide some additional guidance. We figure we might as well post some of these on here as well. On Fridays, like today.

Companies frequently reach out to our Chinese lawyers regarding their desire to do a China joint venture and we often find ourselves suggesting they first do more to make sure there is a sufficient meeting of the minds with the Chinese company before paying lawyers to start drafting the necessary joint venture documents. Our clients then usually ask what they need to know to gain greater certainty. We also get similar questions based on our blog posts.

There is a Chinese saying that is often applied to joint ventures is “same bed, different dreams.” This Chinese saying (同床异梦) actually far predates joint ventures — it applies to any sort of partnership without a meeting of the minds. But it most certainly makes sense for joint ventures as we far too often see Western companies and Chinese companies rush into joint ventures without ever discussing their respective dreams.

Many years ago, a client about to fly to China to meet with a potential Chinese joint venture partner asked for our help in formulating questions to ask of the Chinese company to help determine whether to enter into the joint venture deal. We provided a list of issues to raise at that meeting, and have provided a similar list (honed a bit more each time) to subsequent clients facing the same situation. The goal of raising these issues is to determine whether the two companies share the same dreams, and whether the Chinese company is JV worthy. This list includes the following questions and it is what I send clients who ask me either what they should be discussing with their putative joint venture partner or even when they ask what makes a joint venture work or fail. The below are questions to which the answers will give you a good idea regarding whether your joint venture will work.

  • Why are you seeking to form a joint venture with us and what will be the goals of the joint venture?
  • What will you do for, and with, the joint venture?
  • What exactly do you plan for your company to be doing to advance the business of the joint venture and what exactly do you expect our company will be doing to advance the business of the joint venture?
  • Who will make business decisions for the joint venture, and what will mechanisms will we use for reaching a decision?
  • What will each of us be contributing to the joint venture? For instance: property, technology, intellectual property, money, know-how, and employees. If the joint venture loses money, who will be responsible for putting more money in?
  • How will we resolve disputes? China lawyers like to include provisions saying that we will work out any issues among ourselves and if that fails, we will arbitrate. The tougher question is: how will we deal with day to day disputes in a way so that the joint venture does not collapse?
  • Can either of us use confidential JV information for our own business? Can our own businesses compete with the JV? Can our own businesses do business with the JV?
  • How and when will the joint venture end? What if one of us wants to buy the other out?

Posing these questions puts China  joint venture dreams to the test.

For more on China joint ventures, check out Joint Venture Jeopardy and Avoiding Mistakes in China Joint Ventures

China Contracts That Work

Your enemy won’t do you no harm, ’cause you’ll know where he’s comin’ from; don’t let the handshake and the smile fool ya. Take my advice I’m only tryin’ to school ya. Smiling faces, Smiling Faces, Sometimes they don’t tell the truth.

             Smiling Faces Sometimes, by The Undisputed Truth

Not a month goes by without some company telling one of our China lawyers how great their relationship is with their Chinese counter-party, be it the Chinese company with which they are contemplating a joint venture or the Chinese company that manufactures their widgets.

As lawyers, our thoughts upon hearing this sort of thing tend to be as follows:

1. Great. Truly great. It is always better to have a good relationship with the companies with which you do business, be that company be in China or in Peoria. I am always saying that “we can draft the world’s best contract, but if it is with a crook, it won’t be worth the paper on which it is printed.” So yes, the character of those with whom you do business does matter. A lot.

2. But to us as lawyers, that you are friends with your Chinese counter-party or that you have a great relationship is legally irrelevant. We have been trained to ask the what ifs and the what ifs here are easy-peasy (sorry, but I just wrapped up season two of Stranger Things, which BTW, is every bit as good as season one).

The what ifs here are easy for us because we deal with them pretty much every day, usually in one of the following two situations:

  • The foreign company was wrong about its Chinese counter-party and their relationship with it. Or maybe they were right but the situation changed enough so that the relationship soured.
  • The existing ownership or management structure changed and the relationship changes with it.

Either way, we as lawyers can help a company having to deal with one of the above situations if they have written documents to protect them. And if they don’t, we typically can’t help them.

Contracts are generally written when the relationship among the contracting parties is good. There are three reasons why it makes sense to have a contract with your Chinese counter-party — even if your relationship with it is great:

1.  Clarity. The first is to achieve clarity. To make sure you and the Chinese company are on the same page. For example, if you ask your Chinese supplier if it can get you your product in 20 days, it will say “yes” pretty much every time. But if you put in your contract that the product needs to ship in 20 days AND for every day it is late, the Chinese company must pay you 10% of the value of the order, there is a great chance the Chinese company will get honest with you and tell you that 20 days is impossible. At that point, you and the Chinese company can figure out what is realistic and then you know what to expect, realistically, going forward. Needless to say, I can give countless examples of this sort of thing, but this is yet another reason why we advocate putting your contract in Chinese (and not just translated). Clarity before you start the relationship. It is more important than you think and it totally makes sense no matter how good your relationship may be.

2.  Stricture The second benefit of having a contract with your Chinese counter-party is that it will likely bring that company to heel. By this I mean that just having a well written contract that is at least potentially enforceable means that the Chinese company knows exactly what it must do to comply. And, in most cases, it might as well. Let’s use the 20 day example as the example here as well. If your Chinese manufacturer makes widgets for 25 foreign companies and 5 of those have very clear time deadlines with a very clear liquidated damages provision, and the Chinese company starts falling behind on production, to which companies will the Chinese manufacturer give production priority? Of course it will put the five companies with a good contract at the front of the line and that is relevant even if you have a good relationship. Or are you willing to go to the back of the line because your Chinese counter-party believes you are the safe one to delay because of your good relationship?

3.  Enforceability. You may at some point need to sue your “friend” and if you do it will help to have a China contract that works. And for those who do not  believe China is good with contracts, note that the World Bank ranks China 5th (yes 5) among 183  countries in terms of enforcing contracts.

 

Five China employment law red flags
Five China Employment Document Red Flags

If you have employees in China, you need written Rules and Regulations to govern the terms of your employment relationships. Since China is not an employment at will jurisdiction, well-crafted Rules and Regulations are critical to giving you a basis for disciplining or terminating an employee. And unenforceable or unworkable Rules and Regulations expose you to regulatory, liability and lawsuit risks.

Though we audit our client’s employment documents year-round, the beginning of each year always brings on an onslaught of such work, as doing so seems to be (and should be) part of every company’s New Year’s resolutions. The following are red flags, that tell you (loud and clear) that you need to revise your Rules and Regulations to avoid future trouble.

1. Your Rules and Regulations are in English only. This is by far the one our China employment lawyers see most often and this is a dead tell that whoever drafted your Rules and Regulations was not familiar with Chinese employment laws. Nine out of ten times, this also means that your Rules and Regulations came from overseas and have no real relationship with China’s employment laws. If you don’t have your Rules and Regulations in Chinese, you essentially don’t have Rules and Regulations. Oh, and just translating your English language documents is not going to cut it. You need bilingual China-centric policies written not just for China, but for your industry and your locality.

2. Your Rules and Regulations are in Chinese only. From time to time, our China employment lawyers are called (usually urgently) to assist a foreign employer whose Rules and Regulations are in Chinese only. The problem here is that none of the key HR personnel understand a word of what the Rules and Regulations say and yet they are expected to make important personnel decisions based on them. The other problem is that these China-only Rules and Regulations are nearly always inadequate. In an ideal world, your Rules and Regulations are clearly written in both Chinese and in English.

3. Your documents haven’t been updated for years. China laws change at light speed and China’s employment laws change even faster than that. The fact that employment laws are incredibly local only increases the odds that your Rules and Regulations are no longer good. You could be exposed to huge risks if you make an employment change (discipline, wage reduction or termination especially) based on Rules and Regulations that have become contrary to law. Also, what made sense for your business years ago may no longer make sense now. For example, if you started your business five full-time employees in one city but now half your 50 person workforce is part-time employees in three different cities, you need new Rules and Regulations. Like right now.

4. Your key employment documents are all over the place, both in what they say and where they are located. You cannot believe how common this one is; we see this maybe 75 percent of the time. I recently did an employment audit for a client where three different people from three different cities gave me three different sets of employment documents and nobody knew which were current nor which employees had been given which. The only solution: start all over with yet another set of documents and make sure every single employee signs on for this new one.

5. You lack signed acknowledgments from your employees confirming receipt of your employment documents. This is much worse than most realize. You need to make sure your employees actually receive a copy of your Rules and Regulations and you have proof that they did so. If you end up having an employee dispute, the employee will virtually always claim never to have received a copy of your employer Rules and Regulations. Without a Chinese language acknowledgment of receipt signed by your employees proving they received your Rules and Regulations, you will have a difficult time justifying your employment decision in front of the arbitrator/judge.

If you see yourself in the above, get cracking.

 

 

 

China lawyersSmart Chinese manufacturers know that with their costs rising, they need to be able to distinguish themselves from their peers. One of the ways they are choosing to do this (even more frequently than in the past) is by copying and selling products they are making for their foreign customers. See Your China Factory as your Toughest Competitor. 

Why is this so dangerous? Because bad things nearly always happen when Chinese manufacturers discover their American/European/Australian product buyers will soon be ceasing to buy from them. For this reason, we instruct our clients to line up their new suppliers and have them ready to go, before even hinting that they might be having a problem with their Chinese manufacturer that may lead them to seek out another supplier. We are giving this same advice to companies that come to us wanting to switch suppliers after having learned that their existing supplier is copying and selling their products.

We give this advice because over the years our China lawyers have repeatedly seen the following:

  • Western company tells its China manufacturer it will be ceasing to use China manufacturer for its production. China manufacturer then keeps all of the Western company’s tooling and molds, claiming to own them. The way to prevent this is to get an agreement from your Chinese manufacturer that you own the tooling and molds before your Chinese manufacturer has any inkling that you will be moving on. For more on the importance of mold agreements, check out How Not To Lose Your Molds In China and Want Your China-Based Molds? You’re Probably Too Late For That.
  • Western company tells its China manufacturer that it will be ceasing to use China manufacturer for its production. Western company then learns that someone in China has registered the Western company’s brand names as trademarks in China. Western company is convinced that its China manufacturer is the one that did these registrations, but has no solid evidence to prove this. Western company is now facing not being able to have its product — at least with its own brand name — manufactured in China. See 8 Reasons to Register Your Trademark in China.
  • Western company tells its China manufacturer it will be ceasing to use China manufacturer for its production. A few weeks later, Western company has its products seized at the China border for violating someone’s trademark. The Western company is (rightly) convinced that its China manufacturer is the one behind the product seizure, believing the Chinese manufacturer registered the Western company’s brand names as trademarks in China long ago and is just now using that trademark to seize product as revenge. China has laws forbidding its manufacturers from registering the trademarks of those for whom it manufactures, but because it is usually not possible to prove that your manufacturer in Shenzhen had a cousin in Xi’an do the registering, this sort of thing goes on unchecked. This sort of thing is increasingly happening with design patents as well. For how to prevent this from happening to you, check out the following:
  • Western company tells its China manufacturer it will be ceasing to use China manufacturer for its production. China manufacturer then says it will not be shipping any more product because Western company is late on payments and owes X hundreds of thousands of dollars. China manufacturer then reports Western manufacturer to Sinosure and Sinosure then ceases to insure product sales to this Western company, which can have the effect of convincing Chinese manufacturers not to sell to the Western company without getting 100% payment upfront. For more on Sinosure’s role regarding China exports, check out China Sinosure: What You Need to Know.

So yes, switching your China manufacturer can be risky, at least when done without sufficient planning.

China Lawyers
There’s nothing we can do.

I had no idea what I was going to write about this morning, but thanks to one of our China lawyers updating me regarding the following email exchange, I have a ready-made post.

The email exchange started with the following email (modified to hide any identifiers) from a U.S. company having problems with its China manufacturer:

What do you suggest when a supplier is holding products hostage on a PO to try to get us to place larger future orders at inflated prices.

Our China attorney responded as follows:

That you are writing us (and not your regular attorney) makes me think you have almost no grounds on which to stand. I say this because 99.99 percent of the time this is true of those who write us with manufacturing problems. You are probably too late to remedy this problem with this manufacturer because the only good fix of which I am aware is a manufacturing contract (in Chinese, sealed by your Chinese manufacturer, and with a China court jurisdiction provision) that explicitly prevents this. POs are pretty worthless. Unless you have a contract (in Chinese) that clearly lists out this and that, there is probably little to nothing you can do. See China Contracts that Work. A good China manufacturing contract should also contain a liquidated damages provision, a mold protection provision (so that the factory does not keep your molds if there is a dispute, see Product Molds And Tooling In China: Three Things You Must Do to Hang on to Yours), be properly chopped/sealed (see Signing And Chopping A China Contract. It’s Complicated). It is also critical that your contract is with the right Chinese company as Chinese companies are notorious for signing agreements with an essentially empty shell company, usually based in Hong Kong. And as you have learned here, it also must include pricing and product delivery provisions.

If someone were to contact us with all (or at least most) of the above in line, we would be happy to assist them in dealing with their China manufacturer. But — and here is the kicker — nobody ever has, and there are three simple reasons for that. One, if they had a contract that contained all of these things they likely would never have had the problem in the first place. Two, if they had a contract that contained all of these things and they did have a problem, they would be in a position of sufficient power that they probably could get their Chinese manufacturer to capitulate without the need for an attorney. And three, if they had a contract that contained all of these things, they would simply go back to the lawyer that drafted it (and not to a new lawyer) for assistance.

There is typically an even bigger issue that we always point out when someone comes to us with a manufacturing problem like the above. Whenever someone has any problem with their manufacturer, one of the first questions we ask them is whether they have registered their trade names and logos as China trademarks. We ask this because many times (like well over half) when foreign companies start having problems with their Chinese manufacturer, their Chinese manufacturer has already gone off (using an apparently unrelated third party) and registered the trade names and the logos of the Western company with which it created the dispute. Chinese manufacturers do this to gain leverage and this really works because your Chinese manufacturer can use “your” trademarks to stop you from having your products manufactured in China or shipped out of China with your own brands and logos on them. See When to Register your China Trademark. Ask Tesla and China: Do Just One Thing, Trademarks. Or, as is usually the case, it will use “your” brand name and logo to sell your products in countries where you do not have trademark protection. So if you have not already registered your brand names and logos in China, you should do this IMMEDIATELY (you very well could already be too late) and you should do so before you complain any more to anyone there. And you also should register your brand names and logos in whatever countries in which you sell (or will sell) your products as well.

China manufacturing protection is possible, but just sending out POs and thinking you have it is just wrong. Sorry.

 

China Trademark RegistrationIn the spirit of starting out 2018 on the right foot, I have compiled a list of 12 trademark-related resolutions for any company that does business in China and has at least one brand that they care about.

To the resolutions!

1. Register the trademarks you are using in China for the products/services you are using. This is as close to a no-brainer as there is in China IP. But nearly every week we hear from folks who have discovered that someone else registered their trademark in China, so here goes: China is a first-to-file jurisdiction for trademarks and does not have robust enforcement against trademark squatters. A foreign trademark registration has no relevance in China, because every country has its own trademark system. And no matter how well-known you may think your trademark is, it’s not well-known enough in China to gain protection without registration. The bottom line is that if you don’t register your own trademark, someone else will do it for you – and then you’ll be faced with the unpleasant choice of either paying them off or selecting a new brand name for China. Think of it this way: if you lived on the San Andreas Fault and earthquake insurance was really cheap, wouldn’t you buy insurance?

2. Register your trademarks in additional classes/subclasses. For better or worse, trademark protection in China is limited to the subclass(es) in which a given trademark is registered. With a few minor exceptions, if you have a trademark for a single good in a given subclass, that registration will also cover ALL other goods in that subclass, but no other goods in any other subclass. And because China does not have an affirmative use requirement, it is possible to register your trademark to cover goods and services beyond those you are actually using in China. It could be for goods/services that you hope to use in China one day, or it could be for goods/services you simply don’t want anyone else to use in China using your name. Most companies conduct a cost-benefit analysis and select a few high-priority classes in which they would like protection. If you make swimwear, you probably don’t care too much about someone selling motor oil or microscopes using your brand name. But if you’re a company with deep pockets and/or a deep-seated aversion to seeing someone else use your logo, think about the Starbucks approach: register your trademark in all 45 classes and all of the related subclasses.

3. Register more trademarks than you are currently using. The logic here is similar to the previous resolution. China doesn’t require proof of use to register (or maintain) a trademark, so you can register trademarks that you have never used in any classes (and may never use). These could be marks that you hope to use in China one day, or they could be marks that you simply don’t want anyone else to use in China. Usually the latter category includes trademarks that the China Trademark Office (CTMO) would not deem to conflict with yours, but that you would consider objectionable.

4. Monitor your trademarks. The CTMO is not the most communicative bureaucracy. Absent a challenge (e.g,, based on use or validity) to your trademark, after registration you won’t hear from them for another 10 years, and that’s assuming you renew the mark. You won’t hear from them if a third party tries to register a mark that is similar to yours and in the same subclass(es). You also won’t hear from them if a third party tries to register the exact same mark that you have registered in the U.S. In either case you may have grounds for a successful opposition, but it will depend on the identity of the third party. (Your best shot is if the applicant is a current or former business partner.) But the window of opposition is relatively short – three months from the date of publication – and it’s hard to oppose a trademark you don’t hear about until too late. You can also attempt to invalidate a mark after registration, but at that point you’re fighting a rearguard action against a mark that will be valid unless and until you succeed in invalidating it. The best solution, of course, is to file applications yourself before third parties can do so. But failing that, regularly monitor the CTMO database and the Trademark Gazette for potential conflicts.

5. File non-use cancellations against squatters. Has “your” mark has been registered by a trademark squatter in China? Some squatters have no intention of ever using their registered trademarks in commerce; their sole goal is to sell the mark to the highest bidder. The good news is that three years after registration, all trademarks are vulnerable to cancellation for non-use. If you have the patience to wait three years (or only recently found out about the existence of such a mark), this could be a great option. As an initial step, you should conduct a thorough Internet search to see if the mark is being used. It’s not foolproof, but given the preeminence of e-commerce in China, if someone is legitimately using a mark in China, the Internet will contain signs of such use. If the search comes back clean, file a non-use cancellation against the squatter and also file a new trademark application of your own. (Cancelling a trademark does not transfer ownership of the cancelled mark; it just renders the mark invalid.)

6. Come up with a Chinese name for your mark and register it. If you care about your brand in China, it’s not enough just to register the English-language version. You also need to protect your Chinese brand – even if you don’t even have one yet. The minute your English-language brand gets attention in China, it will be given a Chinese name by the local media and consumers. Without exception. And the minute that happens, someone will register the Chinese name as a trademark, and you’ll have forfeited not only the right to use your Chinese brand name, but the ability to choose it in the first place. This story has played out a number of times throughout the years, with companies from Pfizer to Hermes to Penfolds.

But knowing that you need a Chinese name is different from actually selecting one. As I wrote just a few months ago:

Picking a Chinese name is tricky, and simply being fluent in Chinese does not make someone an expert in Chinese-language branding any more than being fluent in English makes a random American an expert in English-language branding. Far too often we see companies delegate this important decision to their “guy in China,” with predictably middling results. Yes, it’s better than having a non-native speaker pick the Chinese brand name by using Google Translate, but that’s not saying much. We work with several branding companies that specialize in this work.

In the conclusion of this two-part post, I’ll present six more resolutions. Happy new year, everyone!

China AttorneysBecause of this blog, our China lawyers get a fairly steady stream of China law questions from readers, mostly via emails but occasionally via blog comments as well. If we were to conduct research on all the questions we get asked and then comprehensively answer them, we would become overwhelmed. So what we usually do is provide a super fast general answer and, when it is easy to do so, a link or two to a blog post that may provide some additional guidance. We figure we might as well post some of these on here as well. On Fridays, like today.

Occasionally a client will be in such a mad rush to file a trademark that they haven’t even formed the company that will own the trademark. Usually, they have a good reason for being in a rush: they’ve antagonized or otherwise alerted a potential trademark squatter, and the longer they wait, the greater the chance that a third party will apply for “their” trademark. They then ask us: if they know what the name of their company will be, can they still file a trademark application in China?

The short answer is no. Without proof of a trademark applicant’s legal existence (e.g., a passport for an individual or a Certificate of Good Standing for a company), you cannot file a national application with the Chinese Trademark Office. This requirement is not actually that onerous; a screenshot from the Secretary of State’s website is generally sufficient evidence of a company’s existence. But it does mean that you can’t file a trademark application in China immediately after forming your company; you need to wait until the relevant website is updated, which usually takes at least a couple days.

Occasionally, during those couple days, the client learns that the supposed name of their company isn’t actually available after all. And then they’re happy that they had to wait. But mostly, they just wish they had formed their company earlier.

China employee terminations
Rules and Regulations are the key to China employee terminations

As I have previously written, one of the best grounds for unilaterally terminating a China employee without having to pay statutory severance is for a serious breach of employer rules and regulations.

The basic rule is that if you as an employer do not have specific provisions in your rules and regulations that will justify the termination, you may have no recourse against an employee, no matter how terrible your employee’s conduct. Shanghai courts, however, generally dislike employees who act in bad faith and for that reason, a Shanghai-based employer may still be able to terminate an employee who has acted in bad faith so long as the employer rules and regulations give them reasonable grounds for doing so. If you regularly follow my China employment law blog posts, you know Beijing and Shanghai do not usually see eye to eye on most employment law issues. The recent (decided just last month) Alibaba employee case I write about below indicates Beijing is inching closer to Shanghai in putting more emphasis on the employee’s duty of good faith.

The employee was hired by Alibaba to work as a senior manager in Beijing beginning January 28, 2013, under a fixed-term employment contract without a probation period. On April 19, 2013, the employee notified Alibaba via email that he had to take a 2-week sick leave to treat his neck pain and Alibaba approved. Specifically, the employee told Alibaba he suffered from a severe headache and then after a doctor’s appointment, he learned he had serious neck problems and would need two weeks of full rest and he might need hospitalization for more treatment after his follow-up appointment after the Labor Day holiday. The employee later produced a doctor’s note issued on April 18 that essentially confirmed the above. The employee then went to Brazil on April 19, 2013 and returned on May 4, 2013. On April 25, 2013, Alibaba first tried to terminate the employee by citing the employee’s  failure to satisfy the conditions of his employment during the probation period, but it then withdrew that notice. Alibaba then issued a notice of immediate termination to the employee on May 16, 2013, citing a serious breach of employer rules and regulations based on the employee having deceived his employer and having provided false information to go on a leave. Alibaba seemed to believe that if the employee’s neck problems were so bad, he could not and should not have gone to Brazil. The employee disagreed, claiming his trip to Brazil was not for pleasure and contending it was none of the employer’s business where he was while on an approved sick leave.

The employee brought a claim against Alibaba for unlawful termination and demanded the reinstatement of his old job. The employee won at trial and then again on appeal. The primary basis for Alibaba’s losing was because there was nothing in the employer rules and regulations restricting where an employee must be during sick leave and no such mandate in any Chinese law, there could be no statutory basis for the unilateral termination. Finally, at a re-trial before Beijing High People’s Court, the employee lost, somewhat unexpectedly. The Beijing High People’s Court stated that although it was true employers should have reasonably specific rules and regulations, it would be impractical to require the rules and regulations to cover every single detail regarding an employee’s daily activities and when the document was silent on a specific situation, the basic principle in the civil code should apply and the employee can be expected to follow the principle of good faith, which was the foundation of every employment relationship. It ruled that even though the employer rules and regulations did not specify where employees must take their sick leave, the employee’s behavior during the leave must be consistent with the reasons for taking the leave. It went on to say that based on “common sense,” Alibaba had every right to question the purpose of the employee’s leave request and the employee’s refusal to come forward with the truth when questioned by Alibaba meant he violated the principle of good faith, causing significant bad consequences to Alibaba by disrupting its work order and business operation. Alibaba was therefore justified in terminating the employee for his serious breach of the employer rules and regulations.

Please do not read too much into this case. Note the employer was Alibaba, not some WFOE. Also, think about the time and money and not so good publicity Alibaba got for taking this case through all these proceedings. And is it really reasonable to believe this one employee disrupted Alibaba’s business operations by taking a two week trip to Brazil? Go with mutual termination if you feel you must terminate an employee or maybe just give them a second chance.

Bottom Line:, This may be the beginning of a trend (but it probably isn’t), but the bottom line is still the same: if you don’t have  well-crafted rules and regulations, you will still find it nearly impossible to terminate a problem employee, in Beijing and pretty much everywhere else in China.

 

How to save on your China legal fees How to save on your China legal fees, or not.

Everyone wants to save a buck or two. I totally get that.

But to stick with the clichés (but throw in a new currency), there is also such a thing as being penny-wise and pound foolish. To put it bluntly, trying to save money on your China legal fees is usually not the right call.

One of the things I do at the end of each year is to check in on companies that chose not to retain my law firm for various reasons during the year. Sometimes it is because they went with a friend. Sometimes it is because they went with a local lawyer not steeped in China. Sometimes it is because they chose to do it themselves. Almost invariably it is because they chose not to spend the money and almost invariably, I hear back from them that they wish they had (oftentimes putting the blame on someone else in the company for stopping them).

I am right now dealing with a different issue. A really good friend of a really good friend who claims not to have the money to do things completely on the up and up in China keeps asking me for advice on how he can do things on the cheap there. I hear from my really good friend that his good friend is “really messing up” in China but doesn’t know it and yet the very last thing I want to do is to tell this person that. Really, the only thing I want to do is not to have to tell him anything.

A few weeks ago though I got an email from him that said the following (I’ve changed it quite a bit so that even he will not be able to recognize it):

Everything is going great with the WOFE and I’ve been following the advice on your blog throughout the whole process. We made sure to get the company scope right. I also bought Grace’s China Employment Law book which I LOVE. It has helped me immeasurably. What would you recommend to someone who needs to draft a good employee handbook (or as Grace calls it, Rules and Regulations) but can’t afford a top-tier law firm like Harris Bricken? I know from the blog that templates are a no-no, so what’s a cash-strapped start-up to do?

The below is the email I wanted to write, but didn’t:

I just hope you are right about your scope, but I doubt that you are. Scope problems with WFOEs rarely show up quickly and that is what makes them so insidious. You go to a second-rate WFOE formation company whose goal is to get you into a brand spanking new WFOE as quickly and cheaply as possible and you think that should be your goal as well. One of the easiest ways to get a WFOE quickly and cheaply is to give it a narrow scope. This helps ensure a successful WFOE formation but will that WFOE’s scope be broad enough so that your WFOE operate legally not just now but years from now? When our China lawyers work on a WFOE formation we always drill down to determine what our clients want to do now and 3-5 years from now and we draft accordingly, even though this can slow down the WFOE formation process. We are just not willing to hand our clients a  WFOE with a one-year shelf life.

As for an employee handbook, you have read Grace’s book and so you know how critical it is that these be well-crafted in both Chinese and in English. I know of no law firm with a specialized China employment lawyer who is truly bilingual Chinese and English who doesn’t charge what you would call “top-tier law firm” prices.

Instead, I mumbled a few platitudes and wished him well, knowing that this is a person who is likely to fall off a cliff no matter what I do.

I also got an email from the son of a personal friend who is looking to buy a really high-risk product from Chinese manufacturers (think fireworks, but it’s not fireworks):. His email (changed so as to make it so nobody can identify it), is as follows:

I have done more digging into sourcing fireworks from China and I am heeding your advice on the risks and I have recently talked with other lawyers and a couple insurance brokers regarding my situation. They are recommending that I find a way to partner with the Chinese manufacturers and act as their North American distributor and that I seek protection under the Chinese company’s insurance. Do you have any recommendations regarding the type of paperwork I would need to hold the factory accountable for potentially defective products?

My response was to suggest that this may not necessarily be a good way to go, but below is the response I wanted to send:

Are you kidding me? Who the heck are these people giving you this advice because they obviously do not know insurance, China, or US product liability laws? Just because you are the distributor of a product made by someone else does not in any way let you off the hook if the products you are distributing are defective. This is especially true if you are getting your products from China. I am constantly consulting with such distributors and their insurance companies on this very issue after they have been sued.

Getting insurance from Chinese companies is almost always a waste of time and, honestly, whoever suggested otherwise to you almost certainly does not understand China. Here’s our explanation on this. I’d do the opposite and set myself up so that I’m as close to judgment-proof as possible.

In the old days, we used to refer people like these to Chinese law firms but now the good Chinese law firms charge pretty much the same as the good American and British law firms and we are not in the business of handing anyone over to someone in whom we ourselves do not believe.

Just not sure what to do with these sorts of requests beyond mouthing platitudes and then writing on here….

China Movie QuotasLast week, the Chinese film bureau announced a new domestic film incentive program. The exact details of the program have yet to be spelled out, but the gist is that starting January 1, 2018, Chinese movie theaters will receive financial rewards for showing more Chinese films. The rewards are based on a theater’s total box office receipts for the year and kick in if at least 55% of those receipts are for domestic films. Even bigger rewards kick in if the percentages exceed 60% and 66%, respectively. Theaters must submit box office information through the government’s internal system and cannot engage in box office fraud (duh).

The 55% mark may be difficult to attain. As of a few weeks ago, Chinese films had a market share of 52.4% for 2017, and that’s largely because of the enormous revenues from Wolf Warrior 2, the highest-grossing film in China’s history. During the first 6 months of the year (Wolf Warrior 2 opened on July 27), Chinese films had a market share of only 39%.

Many jurisdictions have film incentives, but most are geared toward film production, based on the theory that film productions inject money into the local economy, provide local employment, and develop local expertise (thereby making the jurisdiction even more attractive for future productions). British Columbia is the canonical success story for production incentives, but many US states have also pursued this strategy, as have numerous countries in Europe and beyond. Similarly, almost every country, from the US to Europe to China, offers grants, tax breaks, and other incentives to local filmmakers.

Tying an incentive program to consumption sends a very different message. Measuring the percentage of box office revenue is a zero-sum game; if Chinese films have a higher percentage, that means foreign films (most of which are American) have a lower percentage.

Whether this deal will cause movie theaters to book more Chinese films will largely depend on the specifics of the incentives. All things being equal, this incentive should spur movie theaters to book a Chinese film rather than a foreign film. But when are all things equal? Chinese movie theater owners act in their own economic best interests. Even if they would rather show Chinese films (and I’m sure most of them would), they are in the business of filling seats, and if showing Chinese movies results in lower attendance, the incentives will need to be both enticing and attainable.

This isn’t the first time China has announced an incentive program for increasing the market share of Chinese films. A similar program was announced last March, but the incentive only kicked in for theaters that derived at least 66% of their box office receipts from domestic films. I don’t think the Chinese government reduced the target because they were feeling generous. They wanted results, and they weren’t getting them at 66%.

The knock on Chinese movies of late (at least, until Wolf Warrior 2 single-handedly changed the narrative) was that they hadn’t been good enough to draw audiences. Quality is subjective, but it’s hard to look at the China box office success of films like Warcraft, Resident Evil: The Final Chapter, and Pirates of the Caribbean: Dead Men Tell No Tales and conclude that Chinese audiences have inordinately high standards. Perhaps that’s exactly the point. If foreign movies like these can dominate the Chinese box office, where does that leave Chinese mediocrities?

This incentive program makes the implicit assumption that Chinese movie theaters can affect what Chinese moviegoers decide to see. Otherwise, why reward them? I have my doubts this is true, but if it is, the work of Nobel-prize winning psychologist Daniel Kahneman suggests the Chinese government is going about this all wrong. They should give the incentive to all theaters, and only demand repayment if theaters show too many foreign films. It’s exactly the same economic proposition. But instituting an explicit bias against foreign films has bad optics, and the Chinese government is still negotiating with the MPAA.

No matter what comes out of those negotiations, the bottom line is clear: the Chinese government wants fewer foreign films in its marketplace, not more. Hollywood studios’ involvement in domestic productions may soon shift from a backup plan to the main event.