China lawyers

Because 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 or phone calls 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 quick general answer and, when it is easy to do so, a link or two to a blog post that provides some additional guidance. We figure we might as well post some of these on here as well. On Fridays, like today.

Companies involved in the cannabis industry will sometimes hear about China being a first-to-file jurisdiction and ask if they should file a trademark application in China for their cannabis products. The short answer is no. Cannabis is illegal in China and those who violate the relevant laws are subject to harsh criminal penalties, including the death penalty.

However, it is possible to use the same workaround as in the U.S., where cannabis is also illegal under federal law: register the mark on products that also have legal uses.

China trademark lawyers
China trademark theft is on the rise

Everything China comes in waves and China trademark “theft” is no different. When we first started this blog way back in 2006, we would get about a call a week from someone — usually a U.S. company — wanting us to sue the Chinese company that was blocking the American company’s product from leaving China. We hated those calls because most of the time about all we could do was suggest they try to buy “their” trademark “back” from the Chinese company that now rightfully owned it.

One of our earliest posts (from January 2006), China Trademark “Theft,” talked of how common these calls were back then.

Though troublesome, the damage from domain name usurpation is typically small, particularly as compared to what can happen if someone hijacks your trade name or trademark in China.  We have seen this happen countless times, mostly to American companies who are unfamiliar with the “first to file” trademark law, as opposed to the U.S., British, and Canadian, “first to use” systems.

Though the media love to publish stories deriding China’s intellectual property protection, those articles frequently fail to mention that in most instances involving trademarks, the fault lies with the foreign (American) company, not with Chinese IP enforcement. The reality is that many foreign companies fail to register their trademarks in China and thus have no real right to complain about any “infringement” there. To expect protection, foreign companies must register their trademarks in China and the prudent company does this before going in.

There are actually a number of people in China who make a living (and a good one at that) by usurping foreign trademarks and then selling a license to that trademark to the original, foreign, license holder. Once one comes to grip with the fact that China, like most of the rest of the world is a “first to file” country, one can understand how easy this usurpation is, and also, how easy it is to prevent it.

The fact that you are manufacturing your product in China just for export does not in any way minimize the need for you to protect your trademark. Once someone registers “your” trademark in China, they have the power to stop your goods at the border and prevent them from leaving China. That’s right, they can stop your goods from leaving because they own the trademark, not you. We are aware of companies having to pay hundreds of thousands of dollars to get their trademark “back” and to get their goods flowing out of China again.

As my firm’s lead China trademark lawyers is always saying: the key to protecting trademarks in China is to register them in China before you do business there. This can usually be done at a relatively small cost. You should also consider getting the Chinese language equivalent as well.

For years we probably averaged a call a week from someone who had lost their trademark to China, to someone who had gone ahead and filed it before the non-Chinese company did so. Then, starting maybe 5 or 6 years ago, the number of these calls declined. I have ascribed this decline to two things. First, American companies started getting wiser about the need to get their brands, their logos and their company names registered as trademarks in China, due in small part to this blog even. Second, and of equal importance, China instituted rules to try to stop Chinese manufacturers and trading companies from registering as trademarks the brand names and logos and company names of the foreign companies for whom they were manufacturing or sourcing products. To simplify a bit, your China agent could not hang on to a China trademark that you were using before you brought them on for your manufacturing or product sourcing. We went from one China trademark “theft” call a week to maybe one a month.
But starting about a year or so ago, our China trademark lawyers started getting a ton of China trademark theft calls and the number of those calls has been accelerating ever since. Why has the tide on trademark “theft” come in again? Two reasons. One, there is hardly a sole in China who does not know how to get around the prohibition on an agent registering the trademark that rightfully should go to the foreign company for whom it is acting as an agent. If your manufacturer in Shenzhen wants to secure “your” trademark in China it will not go off and register it under its name as it knows that cannot work. So instead of registering the trademark under its own Shenzhen company name, it will ask a cousin or a nephew in Xi’an to register it under its company name, making it nearly impossible for you to invalidate the trademark. Two, many (most) Chinese factories are hurting and they desperately want to improve their profit margins. What better way to do so than to sell a product under a prestigious or well-known American brand name — or even just any American brand name? See Your China Factory as your Toughest Competitor.
Our China trademark lawyers have been getting so many trademark theft calls of late that they now have a somewhat formulaic email response to those. The following is an amalgamation of a few that recently crossed my desk.
I am sorry to hear that someone has registered your brand name as its trademark in China. Our China trademark lawyers have handled many similar situations and they usually do not end well.
The first thing we usually do in these situations is figure out some basis for challenging this Chinese company’s trademark filing. Our favorite challenge is non-usage of the trademark for more than three years, but in this case because the trademark is less than three years old, that will not work. Our second favorite is when a former factory does the filing because there are laws against that. But to show that it is the former factory, we almost certainly would need to show that the company that actually filed is the same company that you formerly used for your production and that is seldom possible.
If we are not able to get you the trademark you want for widgets, the next thing we do is try to figure out whether there might be a workaround. For example, we had a lawn equipment company that had its brand name filed as a trademark for 17 things related to lawn equipment but the trademark “thief” failed to file for small engines, like those you find on lawn equipment. So our workaround was to get our client the trademark for small engines and then put its name in steel on the engine and then add a sticker or two to the lawnmowers once they hit the United States and Europe where our client sold its lawn equipment. [NOTE: I changed the type of product to make it impossible to be able to identify the company for whom we did this intellectual property workaround]
If none of the above look like they can succeed, we can and should try to buy your name from this Chinese company. Unfortunately, this tends to be a tougher and, more importantly, a more expensive than you likely would expect. We do these buys by lining up a Chinese person (not a lawyer or anyone with any apparent connection to our law firm) in China to handle the negotiations. If someone from our firm were to call, they would will immediately suspect/know we are working for an American company and they will ask for a fortune for you to get your trademark back. It sometimes even makes sense to form a Hong Kong company to do the buy.
Another possibility would be for you to come up with a new name or use another of your names — I am sure you have thought of this and I doubt that it is appealing to you, but it may end up being the only way to go. No matter how we end up proceeding on the name taken from you, I strongly advice that we look at what we can do now to protect whatever other names you use and perhaps your designs as well.
As for your attorneys who you thought had filed for your trademark in China but had not, do you have anything that would indicate you asked them to do so or that they said they would or — better yet — that they said they had actually filed for it? If you have something like that, we could ask that they fund all of the above, assuming that you used real lawyers for this work. See Fake China Law Firms Are The Real Deal and Is This a Real China Lawyer?
Anyway, let’s talk to see if we can help you on this.
China IP licensing

On August 23 and August 24, Law Seminars International will be putting on An Advanced Conference on Current Dealmaking Trends for IP and Technology Licensing: Tips for efficiently and effectively monetizing intellectual property. 

This event will be live at the Courtyard Marriott in Pioneer Square in Downtown Seattle and also via webinar wherever you are. Go here to get a pdf of the entire program. I will be speaking on the second day regarding “enforceable contracts as a starting point [for IP protection]: Classic pitfalls foreigners fall into when dealing with Chinese entities, like drafting in English, and other key considerations.”

Per the organizers:

Who Should Attend. Attorneys, business executives, licensing professionals, and others involved with complex licensing transactions.

Why You Should Attend.  Licenses are one way of bringing intellectual property to life. Without licenses, IP rights lay dormant until weaponized in court. Licenses allow IP to be commercialized, accessed and harmonized without resorting to aggressive enforcement. In today’s climate of constant change and tighter budgets, the ability to spot, craft, draft and negotiate license agreements efficiently and effectively is more important than ever for licensors and licensees.

This conference provides insights on developing issues arising from drafting and negotiating licenses, updates on case law, changes in technologies that impacts licensing, and the rise of new international players in IP licensing.

Join our distinguished faculty as they address the above and additional licensing issues from both outside counsel and in-house perspectives including a panel on problematic clauses and what to do about them.

What You Will Learn. 

  • ~ The anatomy of an effective license agreement
  • ~ NDAs as the courting phase of the licensing relationship
  • ~ Case law update: Recent cases impacting IP licensing values
  • ~ Assigning and licensing trademarks
  • ~ Biopharmaceutical trends including licensing for joint ventures and as a result of collaborative activities
  • ~ Compulsory licensing, Standard Setting Organizations, and FRAND
  • ~ Managing compliance
  • ~ International licensing with China
  • ~ Provisions for resolving licensing disputes
  • ~ Wrap-up: Mock negotiation of a hypothetical licensing agreement

The seminar will consist of the following:

DAY ONE

Introduction & Overview, 9:00 a.m.

Adam L.K. Philipp, Esq.
AEON Law / Seattle, WA

Ramsey M. Al-Salam, Esq.
Perkins Coie / Seattle, WA

 

The Anatomy of an Effective License Agreement, 9:15 a.m.

Core essential terms, including exclusivity, lump sum versus sales-based royalties, royalty bases and rates, exclusions, standard forms and provisions, warranties, indemnities, audit rights, keeping IP from competitors, “poison pill” provisions

Steve Tapia, Esq. , Distinguished Practitioner in Residence
Seattle University School of Law / Seattle, WA

 

NDAs as the Courting Phase of the Licensing Relationship, 10:30 a.m.

The structure and essential terms of non-disclosure agreements; the “new world” of NDAs and how they affect high tech joint ventures; lessons from the Waymo/Uber dispute about protecting trade secrets

Adam L.K. Philipp, Esq.

 

Case Law Update: Recent Cases Impacting IP Licensing Values, 11;15 a.m.

An update on how recent decisions affect the value of IP rights and the enforceability of licensing agreements

Ramsey M. Al-Salam, Esq. , Program Co-Chair
Perkins Coie / Seattle, WA

 

Assigning and Licensing Trademarks, 1:15 p.m.

The need to transfer good will and police the quality of goods sold under a license; the ability of bankrupt licensors to extinguish licensee rights and the impact on pre-bankruptcy negotiations when relations are strained; unique cannabis issues

Jerry A. Riedinger, Esq.
Perkins Coie / Seattle, WA

 

Biopharmaceutical Licensing, 2:00 p.m.

Transactional trends including licensing for joint ventures and as a result of collaborative activities

Gary M. Myles, Esq. , President & CEO
Myles Intellectual Property Law / Issaquah, WA

 

Managing IP Compliance, 3:00 p.m.

Structuring an effective process for counting royalties, tracking work product, regulatory compliance, patent marking, trademark quality control, audit rights, verifying “best efforts”, “most favored” clauses, and anticipating other issues

Neil Zoltowski , Principal
StoneTurn Group / San Francisco, CA

 

Compulsory Licensing, Standard Setting Organizations, and FRAND, 4:15 p.m.

When you have no choice: Where compulsory licensing comes into play including when it’s “necessary” to practice a standard

T. Andrew Culbert, Esq.
Perkins Coie / Seattle, WA

 

Continue the Exchange of Ideas: Reception for Faculty and Attendees, 5:00 p.m.

 

DAY TWO

International Licensing: Adapting to Recent Developments in China, 9:00 a.m.

An enforceable contract as a starting point: Classic pitfalls foreigners fall into when dealing with Chinese entities, like drafting in English, and other key considerations

Daniel P. Harris, Esq.
Harris Bricken / Seattle, WA

New rules on IP transfers; importing & exporting technology; potential impacts from recent trade negotiation; IP enforcement statutory changes, administrative enforcement, and increased damages awarded by courts

Ping Gu, Esq.
Zhong Lun Law Firm / Beijing, China

 

Provisions for Resolving Licensing Disputes, 10:30 a.m.

Choice of resolution technique in the license and choice of technique when enforcing the license: substantive and procedural considerations for choice of law; mediation and arbitration clauses; enforcement stage choice of forum

Mark Wittow, Esq.
K&L Gates / Seattle, WA

 

Wrap-Up: Mock Negotiation of a Hypothetical Licensing Agreement, 11:15 a.m.

Identifying what is most important to your opponent; provisions to tailor the agreement to the type of license and situation; anticipating potential problems from changes in control and adverse events; tips for working through problematic provisions

Steven B. Winters, Esq. , Moderator
Lane Powell / Seattle, WA

Licensee perspective

Jeff Harmes, Esq.
Karcher Harmes / Bainbridge Island, WA

Licensor perspective

Hillery L. Nye, Esq. , General Counsel
Zipwhip / Seattle, WA

I know or know of many of these attorneys and I am very much looking forward to hearing their talks and I urge anyone with an interest in IP go here and sign up. If you use HARRIS as your promo code, you will get a 50% discount.

China contract lawyersEarlier this year, in China and Worldwide: Trademarks Good, Patents Bad, I wrote about how patents are overrated as compared to trademarks.

I cannot tell you how many times I’ve had companies swoon over the idea of spending big money to secure a patent and pooh-pooh my suggestion to spend small money to secure a trademark. Honestly, most of these companies don’t really get it.

I went on to write about how patents are usually expensive to get and expensive to protect whereas trademarks are relatively inexpensive to get and inexpensive to protect.

I then talked about how if sending a cease and desist letter to try to get someone to stop violating your patent usually results in their claiming there is no violation. I then mentioned how if you go to the e-commerce sites on which the alleged patent infringer is selling your product — even if that product almost certainly does infringe your patent — and you ask that e-commerce site to take down the infringing product, the odds are good that site will tell you they are not patent lawyers and you will need a court order or a judgment for them to take it down.

All of this means that if you want to stop your competitor from selling what infringes on your patent you must sue and you likely will need to hire an expensive expert to prove the infringement. Few things in life cost more than international patent litigation, and since my law firm does international patent litigation, I know whereof I speak on this.

I then wrote about why trademarks are simpler and cheaper:

  1. Securing a trademark typically costs 1/3 to 1/4 less to secure than a patent. This is true pretty much everywhere.
  2. If you believe someone is violating your trademark and you send them a cease and desist letter to get them to stop doing so, there is a decent chance they will stop, especially if they are not in the counterfeiting business.
  3. If you go to e-commerce sites and request the product infringing on  your trademark be taken down (and it is in fact violating your registered trademark), there is a very good chance it will be taken down. This is generally true of the leading e-commerce sites around the world. It does NOT take a lawyer to know that if I have a registered trademark in China and the United States for “Harris Special Orthopedic Device” (in the right class), anyone else selling “Harris Special Orthopedic Device” in China or the United States (that did not come from me) is violating my trademark. My law firm’s success rate in taking down offending trademarks is super high. Like 99+ percent high.
  4. Should you choose to sue for a trademark violation, proving the trademark violation is oftentimes relatively easy.

All of the above are also why contracts are another key to protecting your IP from China.

Let me explain.

As we have written here so many times, your scariest competitor is your own supplier. See Your China Factory as your Toughest Competitor. Chinese factories will apply what they have learned from making your products and use that information to compete directly with you. My firm’s China lawyers are fond of pointing out to our clients, “since you will essentially be educating your Chinese manufacturer in how to compete with you, you need contracts that will at least limit what it can do when it does so.” And if you believe it does not make economic sense for your China factory to sell your product directly, let me tell you that our China lawyers have seen so many cases where this has happened that we know it often does:

We have gotten more calls in the last year from companies whose China factories are now directly competing with them than in probably the three years before that combined. Chinese factories are more confident now than they have ever been about going out into the world with their own products, and more willing to toss their foreign customers to the curb early. E-commerce sites do not help matters and the US-China tariff war has been like throwing accelerant on the problem. The US company tells its China supplier that it needs lower prices to make up for the tariffs and the Chinese company — usually surreptitiously — then starts competing directly with its US buyer to make up for its falling margins.

Far too often our clients believe they are protected from their Chinese manufacturer if they get patent protection in all of the markets in which they sell their products (usually this means some combination of the US, Canada, Australia, Europe, Japan, Korea, Mexico and Brazil) since their patents will prevent their Chinese manufacturer from being able to sell into those markets using the client’s IP. Legally, this is correct, but practically, patent lawsuits to stop patent violations are incredibly expensive and time consuming. Do you really want to be embroiled in simultaneous patent litigation in Spain, Japan and Brazil?

In addition, where product development takes place, there is usually an innovation or improvement your Chinese supplier will claim gives them independent rights in the improved product. Since the Chinese side does the work, they are often correct about this, particularly under the civil law patent approach which allows for minimal innovation as the basis for an independent patent claim.

well written contract with your Chinese manufacturer that makes clear that your manufacturer cannot copy your product (beware: these provisions are not easy to write) and makes clear that a breach will lead to real-life and enforceable consequences can give you massive and far-reaching and low cost protection. To the point that your manufacturing contract will likely be more valuable for protecting you even in those countries in which you have a patent,

A well-crafted manufacturing contract also has another powerful benefit that your patents in the US, Canada, Australia, Europe, Japan, Korea, Mexico and Brazil lack: your contract can work worldwide. So yes, getting expensive patents in these places is great, but they do not give you protection in India or Indonesia or Peru or New Zealand, etc., whereas your manufacturing agreement with your Chinese manufacturer can.

So though patent protections can be valuable, they are not the end-all for China or the rest of the world, by any means. Protecting your product against counterfeiting requires a holistic approach tailored to your specific product and situation, usually involving some combination of patents, trademarks, and contracts and more.

For more on the sort of contracts you can use to protect yourself from China counterfeiting, check out the following:

China employment lawyersWhen our employer clients seek our counsel on new China employee hires, we usually (but not always) advise they use an initial fixed term of three years. We also recommend that before the initial employment term is up, they consider whether to extend the employee’s contract for a second employment term. Because China is not an employment at will jurisdiction and terminating a China employee is generally very difficult, you as the employer should be sure not to take an employee beyond an initial term unless you are certain you wish to continue employing that person. If you choose not to renew an employee for a second term you can terminate the employment but you will have to pay severance based on the employee’s years of service for not renewing the contract. This holds true unless you have a legal/contractual basis for terminating the employee without severance, such as an employee’s serious wrongdoing.

Consider this hypothetical. Employer and Employee enter into an employment contract for an initial fixed term. Both before and shortly after the expiration of the initial term, Employer provides Employee with notices that it wishes to renew the contract and each time Employee fails to sign a new contract. Employee then files a labor arbitration claim, demanding statutory severance for the termination. Will Employee prevail? The short answer is that it depends.

In the real case on which this hypothetical is based, the court (the case went from labor arbitration to the court level) noted that 1) Employer provided convincing evidence, including minutes of conversations between the parties and witness testimony, that showed Employer truly intended to renew Employee’s initial contract and 2) Employee failed to produce any evidence to show Employer’s proposed terms and conditions were worse than the terms and conditions in Employee’s initial contract. The court went on to rule that Employer was not obligated to pay statutory severance upon termination because the applicable law stipulates an employer must pay an employee statutory severance for not renewing a contract, unless the employer has offered the employee the same or better terms and conditions for the renewal and the employee does not agree to renew on such proposed terms.

What are the key takeaways from this? First, you as the employer should start thinking about whether to renew an employee’s contract before that employee’s employment term expires. I cannot tell you how many times our China employment lawyers get called by China employer’s asking us what to do with an employee’s contract that expires tomorrow or expired last week — NOT good. Next, regardless of whether you wish to renew or end the employment, you must provide the employee with a written notice of such intent before the end of the employee’s contract term. If you do not want to continue employing the employee, pay the employee statutory severance and process the employee separation in a timely manner. Avoid putting the employee on another probation to see if maybe things will work out this time. If you want the employee to continue working for you but the employee does not wish to renew (assuming the terms and conditions in the proposed new contract are the same or better than the first contract), document that in writing and process the employee separation. In this situation, you don’t have to pay statutory severance since essentially it is the employee terminating the employment.

If the employee is ambiguous as to what he or she wants, do not have the employee work beyond the last date of his or her contract. In other words, you should not have the employee work without a current written contract. This is because China’s employment laws require an employer use a (current) written employment contract with its employees. Even if you signed a first written contract with that employee but since that contract has expired, you likely will be treated as having no contract at all and subject to all the problems and penalties that go with this.

Under China’s written employment laws, an employee is entitled to an open-term contract after two consecutive fixed-terms. However, in practice, in most places in China, once an employee has been renewed at the end of the initial fixed term, that employee has become an open-term employee, which means he or she must be retained as an employee until his or her mandatory retirement age. Therefore, the first renewal should be treated seriously and no employee should be taken beyond the first term unless you want to see the employee on your team long-term. Like forever long term.

Have employees who are approaching the end of their contract terms? NOW is the time to get on it.

 

 

China Lawyers Manufacturing AgreementsChina manufacturing contracts are very different from Western manufacturing contracts, for a whole host of reasons, most of which stem from either differences in laws or differences in economics. This means our China lawyers often must explain why they are doing something in a China manufacturing so different from the way the client “always does it” in the West. One of the more complicated things our China lawyers often must explain is how we usually handle product liability insurance in our China contracts.

 

The below is an amalgamation of about a half dozen emails our China lawyers have written to explain product liability protections in China manufacturing agreements.

The only real way to cover yourself for liability arising from the use of your product in the United States is to obtain insurance in your own name for all applicable risks. Such insurance is expensive, but there is no practical alternative.

We draft our contract manufacturing agreements with China so that the Chinese factory is liable for damages caused caused by defects in your product, including losses incurred due to products liability claims and losses resulting from government mandated product recalls. We provide this to show to the Chinese side that you are serious about getting a product freed from defects. As a practical matter, however, you are very unlikely to have any success in trying to force the Chinese factory to fund your product liability defense or your product recall in the U.S. The odds of your getting a litigation judgment or arbitration award in China against the Chinese factory for reimbursement of a U.S. based products/consumer liability award or government mandated recall costs are also mighty slim. Typically, the most you can expect is a credit on future purchases. Chinese courts (like most foreign courts) believe the U.S. consumer products liability system is fundamentally unfair and they will not support claims based on damages awarded in the U.S. resulting from such claims. The same is true for U.S. government mandated product recalls. Repair or replace or a compensating credit is usually the most that can be obtained, and you will probably need to work pretty hard to get that. So though we include the language, it does not provide much real protection. Your own insurance is what is required. 

2. Few Chinese factories either carry or will not carry insurance for matters that occur in the United States. Most Chinese factories simply refuse to consider the issue. Other factories will say: you obtain the insurance in the United States. But hey, if you want us to pay the premium, let us know the amount. We will then increase the cost of your product to cover the cost of the insurance premium.

The basic point from the Chinese side is that the China price is low because factories in China take no liability for what happens in the United States (or Europe or Canada or Australia, etc.) except for the standard repair and replace warranty for manufacturing defects. That is part of the China price. If you want to load all of the U.S. liability on the Chinese factory, the price will end up being close to or the same as the U.S. price. So the exercise makes no sense.

We have had clients that, for various legitimate reasons, nonetheless wanted their China manufacturer to sign a contract that required the Chinese manufacturer to buy and maintain an insurance policy that covered the products for product liability claims.

Most Chinese manufacturers refused to sign. This then delays execution of your contract manufacturing agreement.

Many of the Chinese manufacturers that did simply ignored the provisions, stating quite accurately that such insurance is nearly impossible to get in China at any price. The American companies for the most part would then ignore the fact that their Chinese manufacturer had failed to secure the required insurance.

The problem with this though is that if you include provisions in your China manufacturing contract that you will later ignore, you weaken the entire agreement. It suggests you will ignore other provisions both to your manufacturer and to a court. So this is not a good idea. For any China contract, it is best that you include in the agreement only matters that you will take a hard line on and enforce. Loose, we will think about it, maybe we will do it language does not work in China. Clear, simple, blunt is the best way to write for Chinese contracts. If you allow a Chinese manufacturer to be flexible, it will most of the time use that flexibility against you. If you require a Chinese judge to think, the judge will likely give up and deny your claim.

Most insurers have standard language they like to force on everyone and that standard language rarely works for China. We can include that language but it may mean the Chinese side will reject your entire agreement? Or maybe they will sign, knowing they will ignore it later? 

China tariffs vaping industry
Is the clock ticking on the vaping industry?

Like so many other U.S. industries, the U.S. vaping industry is now in the crosshairs of a 25% tariff on products imported from China. The first two waves of President Trump’s proposed tariffs against China covered about $50 billion worth of Chinese products but they did not include any vaping products. After China retaliated and proposed its own equivalent tariffs on an estimated $50 billion worth of U.S. products imported into China, President Trump proposed a much bigger third list of China products to cover an additional $200 billion in imports from China.  This third list targets vaping devices, vaping parts, and batteries from China. Because our law firm represents a large number of companies involved in various aspects of the vaping industry we are hearing a handful about how these tariffs will “decimate” this nascent industry.

The U.S. vaping industry is indeed particularly exposed to these tariffs. Though much of the e-liquid used for vaping is made in the United States, almost all of the vaping hardware is imported from China. Just as Gillette makes the most money selling razor cartridges and not razors, many U.S. vaping companies chose to focus on the higher margin e-liquids, rather than lower margin vaping devices. Some have noted that there are no U.S. companies that produce any vaping hardware products. We are hearing of how many vape shops will be unwilling or unable to pay the extra 25% tariffs because they do not believe they will be able to pass these extra costs on to their customers. If this does prove true, the vaping industry will indeed be decimated.

Fortunately, there is still time for vaping companies to seek a tariff exemption for certain vaping products. The U.S. Trade Representative will accept comments until September 6 on whether entire categories of products listed on the third wave of proposed tariffs — the $200 billion in imports from China — should be exempted. There likely will be yet another chance to make more product-specific exclusion requests later in the fall.

For an exclusion request to have any realistic chance at being granted, vaping companies should address the following factors:

  • A description of the physical characteristics (dimensions, material composition, etc.) of the particular vaping products and the 10 digit subheading of the HTSUS tariff category applicable to those products.
  • Whether the particular vaping product is available only from China. In addressing this factor, requesters should address specifically whether the particular vaping product and/or a comparable product is available from sources in the United States and/or in third countries.
  • Whether imposition of additional duties on the particular vaping product would cause severe economic harm to the requester or other U.S. interests.
  • Whether the particular vaping product is strategically important or related to “Made in China 2025” or other Chinese industrial programs.
  • Requesters must provide the annual quantity and value of the Chinese-origin product the requester purchased in each of the last three years. If precise annual quantity and value information are not available, USTR will accept an estimate with justification.
  • Requesters may also provide any other information or data they consider relevant to evaluating their request.

The process for reviewing and deciding on these exclusion requests will not result in any immediate decision but the hope is that a favorable decision eventually will allow for refunding the tariffs paid.

The goal is to have the USTR review the comments and grant exclusions, particularly for products that are not made in the United States and can only be sourced from China. The last time similar tariffs were applied on steel products back in the early 2000s, many exclusions were granted that helped ease the impact of the tariffs on downstream users.

There have already been many opposing comments and exclusion requests submitted for the first two waves of proposed China tariffs. Many of the opposing comments have noted how the proposed tariffs on the Chinese products have nothing to do with  Chinese practices of stealing or extorting intellectual property from U.S companies, which are the reasons claimed for invoking the China tariffs in the first place. Many have also objected to how these tariffs are not likely to change how China respects intellectual property  rights, but will have a catastrophic effect on certain American companies.  What was a booming U.S. vaping industry now faces going bust with the proposed tariffs. If you are in the vaping industry, now is the time to do what you can to prevent this.

Editor’s Note: The above focuses on the vaping industry but much of it holds true for a whole host of other U.S. industries caught up in the tariffs as well. The bottom line is that the situation for products and companies that will be hurt by these tariffs is not good and the chances of overturning the tariffs are in most cases less than 50 percent. But in many cases the situation is not yet hopeless and it behooves you to try.

china attorneys
Love is a many splintered thing.

I recently wrote about how the China attorneys at my firm often hear something like the following from our clients:

“I am not worried about this deal/contract/transaction with this Chinese company because” [choose one or more]:

  • “The owner and I are great friends.”
  • “I trust the owner implicitly.”
  • “There is no way they [the Chinese company] would do this because it would destroy their business.”

I went on to write how I like to start one of my “how to protect your IP from China” speeches with the following:

“Big companies in China want to steal your IP. Small companies in China want to steal your IP. Private companies in China want to steal your IP. Public companies and SOEs in China want to steal your IP. Oh, and that company whose owner you like so much and whose son’s or daughter’s wedding you attended, that company also wants to steal your IP.”

I then wrote how our response to our clients who say these things is not to question the strength of their relationship with the Chinese factory or the honesty of the factory’s owner, but to say that even if all they are saying about their Chinese counterparty is true, there are still substantial risks. And then we tell them about the countless instances where we have seen things go badly wrong even when the American or European company was entirely right in trusting their Chinese counterparty or the economics of the situation.

After I wrote this piece I was reminded of a specific situation we had with a European company that had a 20+ year “great” relationship with its Chinese factory before it learned that this factory was selling the European company’s products around the world for half of what the European company was charging. And when the European company confronted the Chinese company about this, the Chinese company lectured the European company about how it had every moral and legal right to do what it was doing and how sick it was of Chinese companies being exploited by European companies and that it barely made any money at all from this European company.

The Chinese company then proceeded to tell the European company that it would not only continue making and selling the European company’s product wherever it could do so, it would stop making anything for the European company, including the product the European company had already paid for and not yet received. Oh, and just to top it off, it turns out that the Chinese company registered all of the European company’s trademarks in China seven years earlier and it warned the European company that if the European company made its own products in China under the European company’s own name, the Chinese company would have those products seized for violating the Chinese company’s trademarks. The European company ended up shifting its production out of China entirely both because it pretty much had to do so and because it pretty much wanted to do so.

As stark as it is, this story about the European company is not the usual way problems with “trusted” Chinese companies ordinarily arise.

We are always pointing out to our clients that just because you are friends with the owner or just because the owner can be trusted or just because it would not make economic sense for the company to cross you, this does not apply to 1) the company’s employees, 2) the company’s vendors/suppliers; 3) the company’s subsequent owners, or to a 4) changed economic situation.

The problems usually stem not from the owner of the company, but everyone else who gets access to your IP or your trade secrets. These are the sort of things our China lawyers see all the time:

  1. Everything is going great with the Chinese company and then the son or someone else takes over for and everything completely changes. Our China lawyers must have dealt with this at least a dozen times.
  2. Everything is going great with the Chinese company and then the General Manager of the Chinese company or someone else goes off and starts a competitor of the Chinese company and this new competitor steals our client’s IP or trade secrets and starts competing with our client. Our China lawyers must have seen this at least two dozen times. See Inside a Heist of American Chip Designs, as China Bids for Tech Power.
  3. Everything is going great with the Chinese company and then a vendor or a supplier of the Chinese company starts competing with the Chinese company by using our client’s IP or trade secret.
  4. Everything is going great with the Chinese company but then the economics of the industry change and the Chinese company can now make a lot more money by stealing our client’s IP or trade secrets and so it does.

It is for these reasons (and more) that my firm’s China lawyers (and pretty much every other China attorney we know) constantly stress the benefit of having an enforceable contract that covers ownership changes and employees and vendors and suppliers and changing economic situations. For more on what is needed to have an enforceable China contract, check out China Contracts: Make Them Enforceable Or Don’t Bother and China Contracts That Work.

Beyond the contract, you need the registrations required to protect your product/technology/IP. This often means registering your trademark in China in English and in Chinese, registering the copyright in your software and anything else that applies in the PRC and maybe Taiwan elsewhere and registering a design patent in China. These will give you protection against those beyond just the Chinese company with which you are doing business.

 

China employment lawyers
Your China employment documents need to get along

If you have or are going to have employees in China, you need bothwell-written China employment contract with all of your employees (both foreign and domestic) and a set of China-centric Rules and Regulations (often referred to as an employee handbook). An increasing number of China employers have realized how crucial it is to have both of these documents, but many fail to ensure these two documents actually work together. When conducting HR audits our China employment lawyers frequently find conflicts between a company’s employment contracts and its rules and regulations. These sort of language conflicts will nearly always favor the employee in an employment dispute.

Let’s consider this hypothetical. Employer and Employee enter into an employment contract for a fixed term which provides for a guaranteed year-end bonus during the term of employment. But the employer rules and regulations say that resigning employees will not receive a year-end bonus. Employee resigns in the middle of the year and demands Employer pay a prorated bonus based on the actual time Employee worked that year, citing the bonus provision in the employment contract. Employer refuses to pay the bonus, claiming the relevant provision in the Employer rules and regulations should apply. Employee then files a labor arbitration claim. How will the labor arbitrator rule?

In the real case on which this hypothetical is based, the arbitrator noted that the employee’s contract and the employer’s rules and regulations contradicted each other on whether a resigning employee is entitled to the year-end bonus. The arbitrator went on to hold that when there is a discrepancy between an employer’s rules and regulations and the employment contract and the employee requests the contract prevail, the arbitrator or court will grant such a request. Therefore, the arbitrator applied the terms of the employment contract which explicitly stated that the bonus was guaranteed and it ordered Employer pay Employee a prorated bonus based on the time Employee put in for Employer during the year Employee left.

What are the key takeaways from this? First, you as employer need to take the necessary time to make sure your employee contracts are consistent with your employer rules and regulations on all essential issues, such as the terms and conditions for bonuses.

The Bottom line.

  1. If your China company is to have effective HR programs/policies, all of its governing employment documents must both fully comply with all applicable laws (national and local) and they must also be consistent with each other.
  2. This means you should search out and then root out all inconsistencies or conflicts in your employment documents.
  3. Verifying all your employee-related documents fit well together will eliminate employee and management confusion and will go a long way toward preventing problems and disputes down the road.
  4. Use clear, logical, practical and consistent employment documents that tell your management, your China employees, and the Chinese authorities that you are a law-abiding and responsible employer. This sort of signalling pays dividends.

 

China Lawyers for Manufacturing Contracts
China Contract Manufacturing: What to do, what to do….

When our China lawyers provide the first draft of a contract to a client, we typically explain a bit about why we did what we did in the contract. The below email is an amalgamation of various emails from our China manufacturing lawyers explaining their first draft of a China Contract Manufacturing Agreement. I am providing this here because it nicely highlights the sort of things that should go into a China Contract Manufacturing Agreement, along with how Chinese factories typically react to various proposed provisions.

 

Please find attached a first draft in English of a Contract Manufacturing Agreement for China. Please review and provide us with your comments and revisions. After we agree on a final English language version, our legal team will translate this into Chinese.

Please note the following with this Agreement:

1. Your company has a long history working in China and it has procedures it has established for its China manufacturing. If this Agreement needs to be revised to better accord with your company’s existing procedures, please provide us with specific instructions on this and we will make whatever changes are necessary.

2. The basic idea with this CM Agreement is for it to become your company’s standard main agreement that it will use with all of its factories in China. For that reason, our strategy is to include in the agreement only matters that you will expect will never change. Matters that may vary from factory to factory and from time to time with any individual factory have been moved to exhibits or to separate documents that you will provide to the factory. We worked to strike a balance on this issue. However, if there are matters you believe will never change and that we did not include in the CM Agreement draft, let us know and we will include those provisions in this document.

3. Note that this contract manufacturing agreement is limited in scope as follows:

a. It applies only to the PRC. It does not apply to HK, Macao or Taiwan.

b. It applies only to purchases you make  directly from the factory. For purchases from a sourcing agent or broker, you will need a different type of agreement.

4. Please also consider the following matters related to this document:

a. The factory is not permitted to sell your Buyer designed product to anyone but you. The same applies to Custom Product. We have not provided for any restrictions on their selling the factory Base Product into your market. If you want the factory to be restricted in selling its Base Product we can include such a provision, but I note that most Chinese factories strongly resisted restrictions on sale of their Base Product except in cases where the Buyer agrees to purchase large quantities of product within the time period where the restriction applies.

b.  We provided for a very general system for projections. If you want to provide for more specific detail, please provide and we will include.

c. We left a lot to go into the price list so as to provide you with maximum flexibility. However, if there are price provisions you will always require, we can insert those provisions into the main agreement. For example, you may always require one or more of the following:

  • Price quoted as FCA Named Port, and FCA (NOT FOB) Incoterms will apply.
  • You may provide for very specific payment terms. Terms in China vary widely from Net 90 after acceptance (most favorable to the buyer) to 30% down and 70% prior to shipment (most favorable to the factory). If you have a standard you want to hold to, it should be included in the CM Agreement. However, most U.S. companies we work with do not have a standard.
  • If you want to provide specific rules regarding price locks and price adjustments due to exchange rate fluctuation you will need to develop a specific rule that will then be included in the CM Agreement. As you know, Chinese factories are accustomed to manipulating price lock mechanisms and they are accustomed to pushing the exchange rate risk onto the buyer. Fair and normal procedures in this area may receive push back from Chinese factories.

5. It has become customary to require a chopped purchase invoice from the factory to ensure the factory is locked down to specific terms. It is your call on whether you want to use this procedure. Some buyers have a policy of working with purchase orders that are signed and chopped by both the factory and the buyer.

6. This QC section is very general. Many buyers have a QC manual or other formal procedure they require the factory to follow. If you have such a manual, we should reference it in the Agreement and include it either as an exhibit to the Agreement or as a document you will provide to the factory separately. We will need to be clear enough about the name of the QC manual so we are sure it is clear what document is intended. These QC manuals are complex, they change over time and they often vary from product to product and from factory to factory. For that reason, it is usually not practical to include the terms in the main CM agreement.

7. We have included a very general reference to molds and tooling. We have a standard set of provisions for mold ownership and transfer, but it generally only works where the buyer pays for the molds in full. Your system is different, so we have limited the provision to this general reference. As you know, mold disputes are common in the China contracting world, so some attention to this issue is required. I suggest you read Manufacturing in China: Control your Molds (Part 1), Manufacturing in China: Control your Molds (Part 2), and Manufacturing in China: Control your Molds (Part 3).

8. We have provided that the factory will comply with U.S. law for Base Product/Custom Product since the factory is in control of the specifications for such product. For your own buyer designed product, you will be providing the specifications. If compliance with U.S. regulations is required, the specifications will deal with that issue. The big issue with U.S. regulations for product that you design yourself is what entity will take the lead in obtaining approval and what entity will bear the cost of approval. This is a complex and contentious issue normally addressed in a separate agreement relating to the specific product. If you want to deal with this issue in general terms in the CM agreement, please indicate the standard you wish to impose.

9. Some buyers require their Chinese factories to comply with policies imposed by the buyer. These include:

a. Compliance with U.S. and Chinese anti-bribery laws.

b. Treatment of workers and related labor conditions.

If you have specific policies with which you will require the factory comply, please specify and provide us with a copy. In general terms, it is assumed the Chinese factory will operate in compliance with Chinese law related to anti-bribery, payment of taxes, payment of wages and compliance with Chinese labor conditions regulations. It is therefore only required that you make a specific statement here if you are requiring the factory adhere to a standard higher than what is provided by Chinese law or that is imposed by U.S. law.

I look forward to hearing from you soon on this matter.